Capital Economics is pretty bearish on Australia, including its currency

AFP/AFP/Getty ImagesBear(ish).
  • Capital Economics is fairly pessimistic about the prospects for the Australian economy this year.
  • It’s also bearish on the Aussie dollar, forecasting that it will fall to 65 US cents by the end of 2019.
  • Strategists polled by Thomson Reuters see the AUD/USD drifting up to .7400 by early next year.

Capital Economics is bearish on Australia, forecasting sluggish economic growth, higher unemployment, soft inflation, declining home prices and a reversal of recent commodity price strength will force the Reserve Bank of Australia (RBA) to cut official interest rates to 0.75% by the middle of next year.

Given that not so rosy outlook, it also sees the Aussie dollar falling further this year, even if the US Federal Reserve decides to cut interest rates as well.

Here’s a short snippet from a note released by Marcel Thieliant, Senior Economist at Capital Economics, explaining the rationale behind the call.

We think that the financial markets are still underestimating the scope of policy loosening in both the US and Australia. On balance though, further shifts in interest expectations are unlikely to have a large bearing on the exchange rate. Still, we think that the Australian dollar will weaken further against the US dollar over the coming year as we expect the prices of Australia’s key commodity exports to weaken and stocks markets to slump. Our year-end forecast for the AUD/USD is 0.6500.

While Capital Economics sees the AUD/USD falling further before the year is out, not everyone shares that view.

According to strategists polled by Thomson Reuters earlier this month, the median forecast looks for the AUD/USD to strengthen to .7200 by the middle of the year before rising to .7400 by the end of February next year.

The AUD/USD currently trades at .7100.

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