Westpac predicts steep falls for commodities and the Aussie dollar

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Westpac has released its Economic Outlook for May and the bank is forecasting significant falls for commodities and the Australian dollar.

Noting iron ore’s steep fall at the start of this year, the bank predicts a steady decline over the next 18 months.

From current prices of around $61 a tonne, Westpac said that prices for iron ore benchmark 62% fines would remain in the high-$50 range this year before falling to $40 a tonne by the end of 2018.

Falls in coking coal will be even steeper. The bank anticipates that prices will drop from over $US170/tonne to $US79/tonne by December 2018, a fall of 54%.

Source: Westpac

Given that the Aussie dollar is a commodity-linked currency, it’s not surprising that Westpac also predicts a fall in its value next year.

The bank forecast that the AUD will tread water to the end of this year before falling to US65 cents by December 2018:

Source: Westpac

The Aussie dollar may also face headwinds from a divergence in US and Australian benchmark interest rates.

Westpac adopts the consensus view that interest rates aren’t going anywhere fast, and expects the cash rate in Australia to remain at 1.5% to the end of next year.

The bank expects that GDP growth will track around 3% in 2017. That’s broadly in line with the Reserve Bank of Australia’s (RBA) forecast predicting growth will tick above 3% in the first half of 2018.

The end of the housing construction boom looms within Westpac’s 2018 forecast, with the bank predicting that a slowdown in that sector will reduce growth to 2.5% in the 2018 calendar year.

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