- The Australian dollar slumped nearly 10% against the greenback last year.
- HSBC says a similar performance is in store again in 2019 given a deterioration in the domestic economy.
- It says the currency will have to act as a shock absorber for the economy given the RBA is paying close attention to lagging economic indicators.
- HSBC sees the AUD/USD finishing the year at 66 cents.
The Australian dollar was hosed last year, falling close to 10% against the greenback, the largest decline of any G10 currency.
HSBC Currency Strategist Tom Nash thinks a similar fate awaits the Aussie dollar this year, reaffirming his view that the AUD/USD will slide to 66 cents as we enter 2020.
However, unlike 2018 when broad-based US dollar strength and, towards the end of the year, global growth concerns, acted to drag the Aussie lower, Nash says the main factor that will undermine the Aussie this year will be far closer to home: potential spillover effects from the unwind in Australia’s housing market boom.
“While the risks around [a deterioration in the external environment, particularly China], appear to have receded for now, this may be masking the growing risks from the second, which is gathering momentum and deserves more attention,” Nash says.
“The deceleration in the flow of housing credit has been evident since at least early 2018 but has only recently come into focus due to a flurry of weakness in indicators of domestic demand.”
As Nash explains, plenty of domestic economic data in Australia hasn’t been all that pretty.
“This includes a weaker-than-expected Q3 GDP print, the biggest monthly drop in surveyed business conditions since the Global Financial Crisis, a 22.5% year-ended fall in building approvals and monthly retail sales that turned negative in December, confirming two soft quarters of consumer spending,” he says.
While the RBA has reacted to the increasingly weak data flow, seeing it abandon its view that the next move in Australia’s cash rate is “likely to be higher,” with the bank still putting a lot of faith in a continuation of strong labour market conditions, Nash says that suggests the RBA is likely to be reactive, rather than proactive, in providing support to the economy, an outcome that will see the Aussie dollar left to the bulk of work in helping support activity levels.
“In the case of a credit squeeze, the labour market tends to be a lagging indicator, suggesting a proactive easing of policy is unlikely,” he says.
“Instead, more of the initial burden may end up falling on the currency to act as a shock absorber for the rest of the economy.”
That’s what Nash is expecting will occur this year.
“In the ‘ugly contest’ of G10 FX, we still think the AUD looks unattractive versus the higher carry and reserve currency status of the USD,” he says.
“Our forecast remains for AUD/USD to trade down to post-crisis lows of 0.6600 by year-end.”
The AUD/USD currently trades at .7087. That level incorporates an expectation from financial markets that the RBA will be forced to cut Australia’s cash rate by a further 25 basis points by the end of this year.
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