Deutsche Bank (DB) believes the Australian dollar could fall to the mid 60 US cents sometime late in 2015.
That’s because the US Fed will start increasing the Fed funds rate around mid-2015, and the US dollar will strengthen, according to DB chief economist Adam Boyton.
Most believe the Reserve Bank of Australia also will increase official cash rates in 2015 but DB thinks such a view misses three key elements:
- The first is that it will be late 2014-early 2015 when the drop off in mining investment starts to bite.
- The second is the fiscal tightening already built into the Federal budget plus limited growth in spending at the state level.
- The third is the negative impact of a falling terms of trade on the labour market.
DB’s unemployment rate forecast reflects these influences, with the jobless rate stuck around 5.75% over 2014, 2015 and the first half of 2016.
“The sum of these views presents us with a somewhat dramatic conclusion for AUD/USD. Namely that it could be trading with a ‘6 handle’ – in fact well into the 60s come end-2015.”
Importantly, this would be a benign ‘collapse’ in the AUD, not one sparked by a domestic or offshore ‘crisis’.
“Indeed, should the world pan out as DB expects, AUD weakness over coming years could ultimately prove to be an important element in managing the headwinds faced by Australia as the mining boom ebbs,” Boyton says.
He says if DB’s house views on the RBA and the Fed come to pass, it would point to a significant narrowing in the Australian / US 10-year bond spread, as in the chart below:
Given the importance of interest rate differentials as a driver of currencies, a narrowing in the Australian / US bond spread to around 25 basis points come end 2015-start 2016 suggests a significant decline in the Australian dollar.
Adam Boyton: “Indeed our preferred way of expressing the bond spread against AUD/USD raises the prospect of the AUD trading in the mid to low 60s come end 2015.”