- Westpac Bank now expects the US Fed will lift its funds rate four times in the current tightening cycle, up from its previous forecast for three.
- It says that will see US 10-year bond yields push higher than previously thought, an outcome that will see the Aussie dollar come under further selling pressure.
- Westpac expects the AUD/USD will fall to .6800 by September next year before recovering to .7000 by the start of 2020.
The US Federal Reserve will now lift interest rates more than previously thought, and that means the Australian dollar will weaken further against the greenback next year, according to Bill Evans, Chief Economist at Westpac Bank.
“We have extended our profile for interest rate increases by the Federal Reserve’s FOMC by 25 basis points,” he says.
“We now expect the final hike in this cycle to be September 2019 rather than June. This will see the federal funds rate peak at 3.125%.”
So Evans now sees four more 25 basis point hikes from the Fed over the next year, up from his previous forecast for three.
While a less-hawkish tightening cycle than the median FOMC member forecast offered in September for the fed funds rate to peak at 3.4% in early 2020, Evans says his view is still more aggressive than the 2.9% peak markets currently anticipate.
Given his more aggressive forecast profile for rate hikes, Evans says US 10-year yields will now top out at 3.6% rather than the 3.5% level seen previously, an outcome that will weigh on the Australian dollar as negative interest rate differentials between the two nations widen even further.
“The margin between the US and Australian 10 year bond rate increases from a peak of 60 basis points to 70 basis points by September,” he says.
“For the AUD/USD, we now anticipate a further [decline] to .6800 by September.”
Evans says that should be the nadir for the AUD/USD in the current downtrend, paving the way for it to lift back to .7000 by the end of 2019.
The AUD/USD fell to .7020 in late October, the lowest level since February 2016. However, it’s subsequently bounced close to 4% since, leaving it trading at .7270.
Clearly, Evans doesn’t think the recent bounce is the start of a longer-lasting trend.
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