- The Australian dollar has fallen by nearly 40% against the greenback since mid-2011.
- ANZ and Westpac believe the Aussie’s slide isn’t over yet.
- ANZ says “the domestic and external stories are pointing to more substantial weakness for the AUD in 2019”. It sees the AUD/USD finishing the year at .6500.
- On the back of three predicted 25 basis point rate cuts from the RBA this year, Westpac sees the AUD/USD sliding to .6600 over the same time frame.
- Westpac says the AUD/USD could fall even further if the US and China don’t resolve their differences on trade.
The Australian dollar has fallen a long way from the lofty heights seen earlier this decade.
The AUD/USD currently trades at .6930, leaving the decline from the post-float peak of 1.1080 in mid-2011 at close to 40%.
It’s been hammered, as the weekly chart below shows.
Excluding the “flash crash” in currency markets in early January this year, something that saw the AUD/USD collapse to levels last seen during the GFC, you have to go back to early 2016 to find a period when it was last this weak.
According to ANZ’s FX strategy team, led by Daniel Been, the Aussie’s slide isn’t over yet. ANZ is forecasting the AUD/USD will fall to .6500 by the end of this year.
“With trade tension escalating and the likelihood of a resolution dimming, we think the external environment will shift from being an offset to soft domestic conditions to becoming a headwind,” Been said in a note.
“This means both the domestic and external stories are pointing to more substantial weakness for the AUD in 2019.”
Been says that although markets have already priced in at least two, and potentially three, 25 basis point rate cuts from the Reserve Bank of Australia (RBA) by the second half of next year, he doesn’t expect that will prevent further declines at a time when concerns about the outlook for the global economy are elevated.
“We don’t think the AUD is well equipped to weather that shift, particularly given the recent turn in sentiment about a US-China trade deal,” he said.
Nor does he expect potential weakness in the US economy to help the Aussie’s cause.
“We see the recent run of disappointing US data as an issue for risk appetite rather than for the USD, so the recent weakness in the US dollar Index (DXY) is unjustified,” Been said.
As such, while others may see the Aussie as being cheap given just how far it’s fallen, Been doesn’t share that view.
“The AUD is not cheap and does not make a compelling valuation argument to offset the lack of carry, just yet,” he said, referring to declining interest rate differentials to other major currencies as markets moved to .
“In an environment of weaker growth and heightened uncertainty, risk reward suggests that the AUD should decline further.”
ANZ is not the only forecaster who sees further weakness in the AUD/USD ahead.
In a note released on Wednesday, Robert Rennie, head of financial market strategy at Westpac, revised down his end-of-year forecast for the AUD/USD to .6600, below the .6800 level seen previously.
The decision was partially driven by an expectation the RBA will deliver three 25 basis point rate cuts this year, one more than Westpac was forecasting previously.
“This third cut clearly has implications for our AUD forecasts and expectations,” he said.
“Back in February, when we forecast two rate cuts, we lowered our year-end forecast to 0.6800. We have now cut that forecast further to 0.6600.”
And Rennie says there’s a risk the Aussie could slide even further depending on whether the United States and China can resolve their differences on trade.
“We could see a major low — 0.6500 or below — for the AUD mid to late Q3 assuming the RBA cuts June, [next month’s] G20 meeting sees no trade agreement, the next round of tariffs kick in July and the RBA cuts again in August,” he said.
“We would look for any near term strength in the AUD towards 0.7000 as an opportunity to get set for that weakness.”
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