The CBA sees the Aussie dollar doing very little next year

Photo by Scott Barbour/Getty Images

On the back of a strong rally in the prices forAustralia’s key commodity exports, the Commonwealth Bank has decided to lift its year-end forecast for the Australian dollar.

The bank now sees the AUD/USD finishing the year at 0.7700, a modest increase on the 0.7300 forecast previously predicted by the bank.

“With Australia’s Q3 terms of trade rising even more than we expected, we are subsequently revising higher our end-of-year AUD/USD forecast,” said the bank’s currency strategy team, led by Richard Grace.

The table below shows the bank’s new forecasts:

While the adjustments are small, perhaps the most interesting thing is that they don’t expect a significant weakening in the Aussie, at least compared to those views offered by other analysts.

It also suggests that the tight trading range that the AUD/USD has been in since August this year could become the norm, rather than the exception, should the forecasts be proven to be correct.

“Next year we still expect AUD/USD to trade closer to 0.7500 as commodity prices correct modestly lower on slowing demand from China, and an end to the temporary factors that restricted commodity supply,” it says.

“We anticipate Chinese policymakers to ramp up measures aimed at cooling China’s rapid house price growth and curb excessive increases in leverage.”

On the US dollar, the other side of the equation when it comes to the AUD/USD, it says “the USD will not make new cyclical highs and instead drift slightly lower throughout 2017” due to a “very gradual” rate hiking schedule from the Fed and because the “USD has overshot the level implied by real interest rate differentials”.

Despite that expectation, the bank believes there are domestic factors that will likely keep a lid on the Aussie in 2017.

“The risk of more RBA interest rate cuts cannot be ruled out because of Australia’s benign inflation outlook,” it says.

“Australian underlying CPI inflation remains soft at 1.5%pa in Q3 and the RBA forecasts underlying inflation will not reach the lower bound of its 2-3% target band until the end of 2018.

“Also, record high underemployment rate (full-time workers on reduced hours for economic reasons) suggests there is more spare capacity left in Australia’s economy than the decline in the unemployment rate would imply.”

The AUD/USD currently buys .7625.

AUD/USD Daily Chart

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