The NAB says the Aussie dollar's slide may not be over yet

Amer Ghazzal / Barcroft Images / Barcroft Media via Getty Images
  • The NAB says the Australian dollar could soon fall through 70 US cents.
  • It says there’s now a very real threat the United States will announce 25% tariffs on all Chinese imports.
  • The bank is forecasting the AUD/USD to end 2018 at .7100 before gradually lifting back to .7500 by the end of 2019.

The Australian dollar is likely to remain under pressure over the next six months, including the possibility that it may fall below the 70 cent level, says the National Australia Bank’s (NAB) FX Strategy Team.

“We prefer to characterize AUD/USD as a ‘70-75 cents currency’ for a good while to come, but with risk now skewed toward AUD spending at least some time sub-0.70 in the next six months or so if emerging market pressures do intensify significantly,” the NAB says.

Specifically, strategists at the bank believe there’s a strong possibility the US will introduce larger and more widespread tariff on Chinese goods entering the country.

“We’re concerned that the high probability of President Trump proceeding to both lift the recently imposed 10% tariff rate on $US200 billion worth of Chinese imports to 25% and to extend this to the full gamut of Chinese imports — another $US267 billion or so — is not fully priced by markets,” it says.

“If the US mid-term elections come and go and there is still no sign of a Trump Xi ‘love in’ capable of prompting a Sino-US trade pact, then emerging markets, and with that AUD, are at risk of further downward pressure either side of year-end.”

The NAB says much of the recent weakness in the Aussie reflects a tight correlation between the it and emerging market currencies, especially those in Asia.

That’s seen in the chart below showing the AUD/USD overlaid against the Bloomberg JP Morgan Asia Dollar Index.

NAB

As such, it has downgraded its near-term Australian dollar forecasts, predicting the AUD/USD will trade at .7100 by year-end, lower than the .7500 level it had previously penciled in.

From there, it sees the Aussie gradually recovering in the first half of 2019 before ending 2019 buying .7500.

The AUD/USD currently trades at .7063, the lowest level since February 2016.

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