It’s a widely held belief in markets that the Australian Dollar still has further to fall in 2015. The conventional wisdom is that a combination of further rate cuts from the RBA, rate hikes from the US Fed, lower commodity prices and sub-trend economic growth in Australia will ensure the Aussie falls further.
Citibank – in a research note released overnight – picked up on this familiar theme:
“In Australia, the economy continues to grow below trend, as contributions to GDP growth rebalance away from the resource sector to exports and services. The decline in commodity prices is continuing to drive AUD news headlines, and for good reason. Iron ore represents approximately 25% of Australian exports, whilst thermal coal represents 15%, for both of which our commodity colleagues see further downside by the end of 2015. The consequence is not only loss of income from falling prices, but also a further-than-expected drop in mining investment. To add to this, the RBA expects non-mining investment could remain subdued for longer than expected”.
Pointing to recent weak readings on consumer confidence, business sentiment and unemployment expectations Citi – like the majority in the markets – believes the RBA will continue to ease policy in the months ahead, predicting 0.25% rate cuts at both their May and August meetings.
As a response they expect the Australian Dollar will fall to US70c by year end.
Now, Citi is far from alone in this view. There are countless other forecasts out there expressing the belief that both interest rates and AUD will be lower by year end.
But in the light of some recent news flow markets in general could be a little too pessimistic towards Australia.
Since the RBA wrong-footed some in April by keeping interest rates steady the domestic data flow has been steady rather than spectacular while key commodity prices to Australia, in particular iron ore, have begun to move higher. This all at a time when most US data has disappointed scuppering near-term expectations of an early rates liftoff from the Fed.
Breaking with the general market view the NAB picked up on this last week, changing their view for a rate cut from the RBA in May while revising their mid-year forecast for the Aussie to US78c from US75c seen previously.
It’s an interesting break from the majority, particularly given the market today has the probability for a rate cut from the RBA at exactly 50%.
While Citi and the majority of may well be proved to be correct – Australian data remains patchy, the US economy will likely improve following the pattern of recent years and commodity prices could come under renewed pressure should the US Dollar resume its rally – all of these remain a distinct possibility.
However – as April has shown – a lower Australian dollar is not a done deal yet. Should the RBA remain on hold in May and the recent gain in commodity prices be sustained it may not only be the NAB revising up their forecasts.
Business Insider Emails & Alerts
Site highlights each day to your inbox.