Hot on the heels of ANZ changing its Australian dollar forecasts, the National Australia Bank has done the same, predicting that expected weakness in the Aussie will take far longer than what had been previously anticipated.
Firstly, here’s the NAB’s new forecasts, not only for the AUD/USD but also against the crosses along with the NZD/USD.
Like the ANZ, the NAB sees the Australian dollar pushing higher in the near-term, suggesting that the Aussie will finish the September quarter buying 77 US cents before beginning its slow grind lower.
As opposed to its previous expectation that the Aussie would bottom out at 69 cents in mid-2017, the bank now sees the Aussie hitting a cyclical low of 68 cents by the middle of 2018.
Higher for longer, albeit eventually lower, in a nutshell.
“With no further RBA cuts expected this year, the AUD now looks unlikely to fall much if at all before late 2016 and assuming the Fed moves in December as NAB expects,” wrote Ray Attrill, co-head of FX strategy at the NAB. “We still project a significant fall in 2017, aided by further RBA easing, falls in Australia’s terms of trade and a modestly stronger US dollar.”
“Given NAB’s forecast for a growth slowdown come 2018 and a delayed tightening cycle, the eventual low in the AUD is still seen sub-0.70,” he adds.
One of the chief factors behind the NAB’s forecast changes has been the diminished impact that yield differentials have had on the level of the Australian dollar, something Attrill suggests has been blunted by a combination of three factors, listed below.
- An ongoing grab for yield in a world where the universe of negative yielding bonds has swelled to USD13.4tn (and not all of them sovereign) amidst ongoing QE in the Eurozone and Japan and recently restarted QE in the UK, alongside expectations that monetary policy makers almost everywhere outside the United States retain an easing bias.
- A grind lower in market volatility measures now back to close to post-GFC lows. In the case of currency volatility this enhances the volatility-adjusted returns on higher yielding currencies. In the case of lower equity volatility, it supports demand for riskier assets in general (including the likes of EM and where the correlation between EM currencies, AUD remains strong).
- Declines in Australian inflation — whether actual or inflation expectations — meaning that real yields (and real yield differentials) have not declined as fast as nominal yields and yield spreads.
While those factors will continue to support the Aussie near term, says Attrill, he believes that a series of rate hikes from the US Federal Reserve over the next two years should provide meaningful support for the US dollar, helping to weaken the Aussie as a consequence.
“NAB has a total of three Fed tightenings through to end 2017 in our forecasts (and the same again through end 2018), if delivered, these should provide meaningful support for the USD,” he says.
“Our forecast for 0.68 come 2018 does assume some USD support from higher US rates (including modestly higher bond yields) and little likelihood of the RBA tightening through 2018.
“Also driving this is our expectation of further declines in Australia’s terms of trade, by as much as 10% between now and mid-2018.”
Financial markets do not fully price a 0.25% rate hike being delivered in the US until the September quarter next year.