AUD: back to the 60s?
We now forecast AUD/USD will trade at 0.7000 at the end of 2015.
Given the normal trading range in AUD of 10% per quarter, AUD is likely to dip below 0.7000 at some point in 2015. There are five reasons for our lower AUD forecasts.
(i) A stronger USD (see above). A stronger USD is highly correlated with
a weaker AUD/USD (chart 5).
(ii) Australia’s economic transition from mining investment-led growth to other drivers of economic growth is proving more difficult than envisaged. Of particular concern is the failure of non-mining business investment to pick up strongly enough. Domestic demand expanded by only 1.2%pa in December 2014. Such weak domestic spending is consistent with further modest increases in the unemployment rate.
(iii) We expect the Reserve Bank of Australia to cut the cash rate at least once more as Australia’s unemployment rate continues to lift. Consequently, we predict the Australia-US two year swap spread to narrow sharply from 122bps currently to nearer zero in mid-2016.
(iv) Capital inflows into Australia will ease: (a) Australia’s giant LNG projects will be complete in 2015/16, reducing FDI inflows; (b) the USD strength that we predict will reduce the need for currency market intervention by emerging market central banks and lower the diversification bid into AUD.
(v) Global commodity supply is likely to keep growing faster than global commodity demand, particularly for iron ore. This disconnect between demand and supply will keep downward pressure on commodity prices. Lower commodity prices will reduce Australia’s terms of trade further and pressure AUD lower.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
