There’s now a reasonable chance that the US Fed funds rate will move above the RBA’s cash rate at some point next year.
It’s got some investors excited about the prospect of an Aussie dollar bloodbath, buoyed by the understanding that when US interest rates exceeded Australia’s in the past, the Aussie was always hammered.
This chart from the National Australia Bank (NAB) shows the relationship between Australian and US overnight borrowing rates versus movements in the AUD/USD cross.
While some will be readying phrases such as the Aussie battler and Pacific peso in anticipation of renewed Australian dollar weakness, even if US rates exceed Australia’s it’s unlikely to see the Aussie tumble below 50 cents as it did in the early 2000s, says the NAB.
“While acknowledging that the rate spread was likely to be a negative for the Australian dollar, we pointed out that the early 2000s situation was quite different, as then the US dollar was super strong on the back of strong capital flows into the US in turn related to the tech boom, US real interest rates were very high and capital flows to Australia were relatively suppressed by views that Australia was an ‘old economy’ and why would anyone ever invest in mining again?!”
The NAB currently sees the AUD/USD weakening to 70 cents over the next six to 12 months on the back of higher US interest rates and some moderation in Australia’s key commodity export prices.
A selloff in other words, rather than a shellacking.