- The Aussie dollar has been slammed this year, although its managed to crawl higher against the greenback in November after hitting a more than two-year low in late October.
- JP Morgan doesn’t expect the bounce will last, forecasting the AUD/USD will spend a considerable period of 2019 below the .7000 level.
- The bank says the risks to its call are to the downside.
After threatening to fall below 70 cents late last month, the Australian dollar has bounced against the greenback in November, helped in part by solid Australian employment data, hopes for trade resolution between the US and China, some softening in US interest rate expectations and, given stretched short positioning that had built up to the highest levels in several years, short covering from some investors.
Many are now wondering whether the bounce from .7020 in late October was the low-point for the AUD/USD in the current cycle?
To JP Morgan, the answer to that question is no.
According to the bank’s Australian economics team, lead by Sally Auld, the AUD/USD will spend a considerable period of next year below 70 cents.
“Many of the themes for the AUD in 2019 look familiar — narrowing interest rate differentials as the Fed continues to normalise policy, a further, but modest, slowing in Chinese growth and lower commodity prices,” Auld says.
“We forecast AUD/USD at .6900 by the middle of 2019 and .6800 by year-end.”
Given the macro backdrop, Auld says the risks to this view are that the Aussie will trade even lower than anticipated.
“Our risk bias to AUD/USD in the next year remains to the downside given domestic politics, risks around housing and persistent EM vulnerabilities,” she says.
As things currently stand, Auld says the AUD/USD looks like fair value relative to rate spreads and the Chinese growth impulse, but cheap compared to commodity prices.
However, while that suggests there may be upside risks ahead, Auld says the discount in the Aussie despite firm commodity prices is likely to be sustained.
“History suggests that the mis-valuation versus commodity prices can sustain in the short run, supporting our view of a modest decline in AUD in 2019 despite an expected 8% fall in the terms of trade through to the December quarter next year.”
The AUD/USD currently trades at .7260.