- The Australian dollar has fallen over 11% against the greenback since late January.
- UBS thinks it will reverse those losses, and more, by the end of 2019, forecasting the Aussie will trade at 82 cents.
- It says a less-hawkish US Federal Reserve, China stimulus and firm commodity prices will be the main drivers of the reversal.
It’s been a tough year for the Australian dollar, particularly against the greenback.
The Aussie has tumbled over 11% since late January, sliding from above 81 cents to just 72.1 cents today. Many suspect it will go even lower.
But not UBS.
According to its Global Macro Strategy team, the Aussie is likely to recover all of the ground lost this year, and them some, by the end of 2019.
It’s forecasting the AUD/USD to trade at 82 cents, representing an increase of close to 14%.
Yes, it’s a big contrarian call compared to the broader market, underpinned by an equally contrarian call when it comes to the outlook for official interest rate settings from the US Federal Reserve.
“Our bullish AUD views have been challenged for a while, but the factors which have thwarted any AUD appreciation in recent months appear to be dissipating,” UBS says.
“US rates are unlikely to go much higher and indeed we expect a Fed pause in December — this should take the steam out of the USD rally.”
Indeed it would, especially with financial markets pricing in an 80% chance of another 25 basis point rate hike from the Fed in December as at the time of writing.
Along with expecting the Fed to change its hawkish tune, UBS expects the headwinds buffeting the Aussie dollar from mounting trade tensions between the United States and China, partially responsible for creating volatility in emerging markets along with higher US interest rates and stronger dollar, will diminish in the period ahead.
“[The] Aussie was hit hard by trade tensions, emerging market tensions and China growth worries,” it says.
“These factors are starting to abate and we expect Chinese stimulus to show up more meaningfully in Q4.”
UBS also points to China’s ongoing push for blue skies, seeing Chinese industrial firms seek out higher quality, more efficient raw materials, as another factor that will support the Aussie, keeping iron ore prices elevated as well as Australia’s terms of trade.
But what about weakness in Australia’s housing market; one factor, along with still weak inflationary and wage pressures, that many believe will prevent the RBA from lifting official interest rates until 2020? Shouldn’t keep the Aussie under pressure from a yield differential perspective?
Not so, says UBS.
In its opinion, that’s already priced by financial markets. Along with an economy that has, to date at least, fared well despite falling home prices, it says this is unlikely to weigh on the currency over its forecast period.
“The market does not see the first tightening move [from the RBA] until late 2020, therefore there is little room for Aussie rates to drag the AUD lower,” it says.
“Whilst a slower housing market is offset by other factors, we do not expect it to weigh on the AUD.”
If UBS is right that the AUD/USD will trade at 82 cents by the end of next year, it would leave it sitting at the highest level since early 2015.
That’d be good news for anyone looking to travel or invest using Aussie dollars overseas, but not for policymakers who would like to see it continue to support Australia’s trade-exposed sectors, and with it the broader economy.
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