Kouk says Australian dollar has bottomed

It’s never a dull moment with the Kouk:

With the market all but pricing in a 1.75 per cent cash rate, the 3 year bond yield hovering around 1.90 per cent, 10 year yields around 2.50 per cent and the Australian dollar US$0.78 or so, it is time to look for the next trading opportunity.

It’s time to position for a back up in yields in the bond market and a change in the current market pricing for the RBA cash rate. This change in view is not based on any radically different view on the domestic economy – right now and in the near term, things are still very soft, growth is set to remain below par and there still seems to be a rate cut or two in the RBA’s kit bag. The issue is that the interest rate markets now finally know this and have more or less moved to where I thought they might get to. It is now prudent to start thinking about how markets will trade over the next year and lower yields and a lower AUD from here seem less likely than a rise.

For the AUD it is a similar theme, even though it has not broken below US$0.75 as seemed likely not that long ago. It may still dip below US$0.75, of course, but the balance of probability trading benchmarks are tilting away from a bearish AUD outlook to a more neutral position. It wont take too much to see a mildly positive set of benchmarks emerge for the Aussie dollar in coming weeks and months. It is important to note that the AUD did fall a smashing 34 US cents from its peak level in 2011 so getting bearish after such a move is a mugs game.


It now seems the conditions underpinning the gloomy forecast for the cash rate falling to 1.5 per cent by end 2015 are fading. It still may well happen, but from a trading perspective, when 1.8 per cent is priced it, the return from being right has to be locked in and consideration now must be given to a reversal. It’s a view with a long run horizon. That consideration has lead me to put on trades that profit if the RBA ends the easing cycle with a cash rate at 2.0 per cent (or 2.25 per cent of course) and / or we get to the position where interest rate hikes start to be priced in, let alone delivered by the RBA, during late 2015 or 2016. With these trades, the losses from the RBA cutting to 1.75 per cent are trivial and form part of the trading risk-reversal strategy. Of course the trades lose money if in fact the RBA cuts to 1.5 per cent or less.

It is a scenario where the implied yield on 3 year bond futures, for example, are targeted to rise from current levels around 1.90 per cent with the 10 years also seeing a higher implied yield than the current 2.50 per cent.


It is always, always, always, always difficult to pick bottoms in currency markets, but that is what I am trying to position for with the Australian dollar. It is now time to think about getting cautiously long, and anticipate some greater risk of a return to US$0.80 and even US$0.85 than a scenario of a sustained break towards US$0.75. Trades that profit from the AUD ending 2015 at US$0.8250 and higher seem to be risks worth taking.


I still think the economy is negotiating its way through dreadfully difficult times. The collapse in mining investment, a sharp decline in the terms of trade, generally gloomy business and consumer confidence are all acting as constraints on a return to above trend growth. When a soggy global economy is thrown into the melting pot, it is easy to see why the RBA needed to edge interest rates lower.

That said, there have been some interesting, and important, moves in markets in the past month or so. The ASX has trended sharply higher which will boost wealth, confidence and purchasing power of the household sector. There has even been a small rise in some commodity prices in the past month, albeit from extraordinary lows. Any further gains would of course be good news for the Australian economy.

At the same time, fiscal policy seems set to be positioned more towards growth than a budget surplus, meaning government demand will be kicking in a touch more to bottom line GDP through 2015 and probably into 2016 than was the case in previous years.

Globally, the recent news from the Eurozone has been a little better, admittedly benchmarked against dismal expectations. The US growth cycle remains solid, and India is enjoying a strong cyclical rebound in activity. China is always a difficult call, but the authorities seem to be positioning the economy for 7 per cent growth which would be a good outcome. Japan appears to be exiting its mid-2014 recession with the Nikkei scaling fresh cyclical highs at long last.

In Australia, consumer demand growth remains a little below trend but with household wealth surging on the back on house prices and the stock market, it would not take much to witness a sharply stronger pace of consumption growth over the next quarter or two. A record number of new dwelling starts should also feed into a pick-up in retail spending with the construction surge itself is a significant positive for domestic growth.

And those dogged house prices, which looked like cooling off in the second of 2014, have shown remarkable resilience with annual growth still hovering around 8 per cent. This is still too high for everyone’s liking. While house price growth is more likely than not to slow further during 2015, the RBA has expressed concern and discomfort at the time it is taking to crimp those house price gains. This may have a high weighting in RBA thinking and actions, making it hard for the Bank to deliver a cash rate below 2.0 per cent. This is just another issue that is behind my view change.

Of course, the big issues for monetary policy and the markets are inflation and the labour market. Inflation is low and is set to remain low aided and abetted by record low wages growth and rising unemployment. The issues were fundamental to the recent rate cut and the current market pricing. But if the early signs of a turn in the growth profile turn into a pick up in activity later in the year, the unemployment rate may peak around 6.75 per cent before falling. And recall, the market is currently pricing in almost two full rate cuts in anticipation of more news of weak growth and any upside surprises to jobs and inflation will see that pricing change.


This change of view may be a tad premature, but such is the nature of markets, it often pays to get in early. When more and more market commentators are now getting bearish on the AUD after a 34 cent fall, it is a signal for a change in view on the AUD. So too with interest rates. Those calling for interest rate hikes late in 2014 and now calling interest rate cuts when they are fully priced in. Again, this is often a sign that the turning point, in the other direction, is near.

Actually, I was under the impression that catching a falling knife was a mug’s game…

I’ll take the other side of that bet. Rates will go lower this year and the dollar will reach 70 cents. Next year there’ll be more rate cuts and a dollar at 60 cents. And bond yields will fall throughout.


  1. You don’t think future cuts are already priced in?

    What future developments do you think the market is underestimating?

    • One and a bit cuts are priced into bonds. I don’t think it’s priced into the AUD, no. There’s too much doubt about timing.

      Future cuts are not priced in at all, certainly not to where they are going.

      • Just FYI, the Kouk told me that the AUD (then ~US$0.75) was going to parity with the USD back in 1997. It then went to ~0.50c instead.

        Lucky for me, my intuition told me he had no idea, and I ignored him. Like you, I took the other side of that bet.

      • He is a better contrain indicator than pascoe could ever be… InCorrect 101% of the time.

        What startles me is that he doesn’t even offer a time frame. This is the bottom for this hour? today? This week? Month? Year? What is it?

    • SMH has glorified this dimwit by describing the Kouk as one of the few economists to get the last rate cut right

      astonishes me how economists never lose their reputation even when they are completely useless

  2. mine-otour in a china shop

    Bottomed against what – the US dollar – but what about other currencies? Big bet to make given the US uncertainty, china worries, commodity price uncertainty and euro worries.

    Anyone who wants to play big at this time with the most difficult variable to forecast, then good luck to them and their followers.

    For me the Kouk would have been better picking us the first 4 winners at Rosehill on Saturday.

    • As Taleb writes in antifragile, don’t ask people what they think, ask them what they are doing with their own $$$.

  3. “And bond yields will fall throughout”

    Aren’t these monster budget deficits supposed to put bond rates up? At least that’s what the Liberals and their tame pals in the commentariat said when Labor was in government.

    Just asking.

  4. Still confusing the structural with the cyclical (and through a political bias as an ex-ALP economic adviser), he maybe right on this upcycle.

    But for longer term investors, any rally up to 80 or 85 cents provide a MUCH better opportunity to go short AUD, IMO.

    Monthly ATR is in the 3 cent range, so up to 81 cents in this cycle is completely within the norm, but not that big of a long trading opportunity.

    More importantly – where are his stops? What would cause him to change his mind? Where would he increase his trade?

    Lots of one liner macro throwaways with little/no probability outcome/risk analysis/management/portfolio sizing etc etc – its not the clearest of trading calls/write-ups in my opinion.

    • Kouk is an economist. He is a not a finance guy. He won’t have thought about an implementable trading strategy.

    • But for longer term investors, any rally up to 80 or 85 cents provide a MUCH better opportunity to go short AUD, IMO.

      Yes, I think I’ll be buying more USDs if the AUD gets much above 80c. My USDs bought at 92c and 87c are doing very nicely thank you. Happy holding them for a while.

      • Rent Seeking Missile

        coolnik – look for an ETF on the ASX called ‘USD’.

        Or get a foreign currency account. HSBC offers one in US dollars.

      • “My USDs bought at 92c and 87c are doing very nicely thank you.”

        As are mine that I bought at 97 and 1.03…of course I wish I’d bought more but hindsight always brings clarity of mind.

        Cash for me (in safety deposit box) bought via Auspost who seem to have the best currency rates for cash.

      • Auspost appears to be offering USD at ~3.5% below market through the “travel money” option. That seems horrific. Am I looking in the right place?

  5. Kouk may get a bounce here at 0.77. I can’t see it going higher than 0.80 though. Unless Fed decides to postpone June rate hike which could see 0.83-0.85 max.

    H&H is right about catching falling knives. I don’t know what’s worse, Kouk bottom picking AUD or Kouk’s interest rate hike call in April 2014.

  6. Neither short nor long.

    It is true that the AUD is making some sort of bottom and might very well have a small reprisal.

    It may even trade with in a certain band for this entire year but one thing is for sure AUD is going to 60 cents that is the trend and going against the trend is never wise.

      • I have a magic crystal ball… Trend isn’t the oppurtive word just then but at least the trajectory for the last year suggests furth declines albeit at a lower pace. (Especially if key events that unraveled our dollar continue)

        But there’s are also multiple reasons that have allready been listed.

        A belief of:
        Lower interest rates here
        Higher from the fed
        A decline of TOT beyond what RBA is predicting.

        As well as many other issues that are looking to strike Australia.

        The only wild card now that I can see is a improvement in gas prices lifting our tot and confidence in our currency. (Not likely)

      • Thanks for that Simplicity,
        Forgive my ignorance but was thinking that there is some sort of formula that the educated on the matter use to come up with the number or something …

        Re- Fed raising IR, i think the consensus is that it’s not happening any time soon based on their latest statement and previous MB posts about US economy not actually doing well…

      • No formulas Paul, currency is extremely unpredictable. You need a running picture of the world and trade with in to conjure up any half decent predictions.

        I say 60 cent is reachable over the next 1-3 years but with a ultimate long term prediction of 40-50 cents.

        Thats the direction i foresee (and truth is much lower i just don’t want to attract flak from those around)

        Currency is only as good as the items that it can be exchanged for.

        Commodities are the be all and end all for this country.

      • Also in regards to US economy not doing so well I would suggest this is overly more negative for australian currency as oppose to usd.

        It has been a discussion point between myself and Wiley Wolf. Hes a little AUD bullish in regards to “false” usa figures and his belief that a america slowdown / bust might propel AUD higher.

        He has swayed my short term veiws of the AUD possibly going higher maybe 85+ but subsequently swayed my veiws on just how low the AUD will go during a longer time frame. (I know that sounds odd.)

        Either way I’m not trading AUD, I’m expecting some volatility for the next month or so.

        Pardon long winded replies, writing helps me to solidify my ideas…

  7. Kouk in Feb 2014 :

    With any good fortune Australia’s way, a retest of the 110 high is possible in the next 24 months.

    The drivers of the Aussie dollar are best summed up as commodity prices, the trade balance, interest rate differentials, risk via Australia’s sovereign credit rating, global growth and cross border investment flows. There are others, but they are generally of low importance.

    Most of these drivers are either neutral or positive towards the AUD.

    • Your joking Calvin, he really said those risk events are only neutral or positive? What an idiot.

      When the sovereign has a AAA rating how can it only be neutral or positive?

  8. Houses

    Saw the Kouk described in the Fairfax Markets Live blog as “one of the few economists to get the Feb rate cut right”.

    Was expecting to see a mushroom cloud in these parts on reading that – your discussion above is wonderfully restrained and just the facts. Good to see.

  9. Long term monthly chart shows how key 80c was. Unless it gets above than and consolidates, the bears remain in control.

    At the moment we are just treading water. And if you tread water for a while, the most common next move is with the trend. Which is down.

    64C the obvious long term target (1993 and 2008 lows), next stop following the 2002 low of 48C.

      • Anyone in a business of any kind deals in odds and risk minimisation in the face of those odds. No one KNOWS that’s true.
        Just the same I’m sure inteersted in input on the subject.