JPM: Australian dollar is bottoming

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From JPM:

72015 was another interesting year for the Australian dollar. For a start, AUD/USD reached its lowest level since 2009 in 3Q15. As Chart 1 illustrates, the range for the AUD in 2015 was one of the smaller seen in recent years, but continues the pattern of lower highs and lower lows observed over the past three years. For 2016, we expect similar contours for the AUD’s trajectory; although we expect the range to be smaller than seen in previous years, we still expect that the pattern of lower lows and lower highs will be repeated. Generally we see the AUD biased lower over the next 3-6 months on the back of modest softness in commodity prices and Fed tightening (1Q16 target USD0.67), before finding some support later in the year (4Q16 target USD0.72) as the terms of trade trough and the domestic economy gains enough traction such that RBA rate normalization is likely (J.P. Morgan economists are forecasting 50bp of hikes in 1H17). Thinking about what might be “new” for the AUD in 2016 relative to 2015, we identify the outlook for commodity prices as the key differentiator in the year ahead. Australia’s terms of trade have fallen 30% since 3Q11, acting as a compelling drag on the currency and nominal GDP in recent years. But for 2016, we do not have a lot of shape in our forecast profile for the terms of trade, largely because we see Australia’s major commodity prices as mostly range bound in the year ahead. Indeed, J.P. Morgan economists are forecasting the terms of trade to decline 3.5% from 3Q15 through to 1Q16, and then for the terms of trade to rise 4.1% from 1Q16 through to 4Q16.

Cripes that’s wrong! The MB secret sauce for the Aussie dollar is to understand iron ore. It is the key to everything Australian (along with with coal, it makes up half the Terms of Trade (ToT)) and it is not going to bottom until it’s swallowing at $20 so neither is the ToT nor the currency:

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About the author
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.