Goldman Sachs is out with a note contemplating a lower dollar:
A simple way of addressing this question is to determine where AUD/USD should be trading given its most basic macro fundamentals: the current 2-year swap rate differential between the two countries and Australia’s terms of trade. Over long periods of time, these have been the central parts of most successful models of the AUD. A regression using quarterly data from 2000 suggests that AUD/USD should be trading around 0.85 rather than a shave below parity. Based on our ‘fair value’ estimate for the 2-year swap rate differential (as estimated in a recent edition of the Asia Interest Rate Strategy) and our year-ahead forecast for Australia’s terms of trade, our model suggests that the cross could fall to 0.80 at least, judging by the macro outlook…If commodity prices continue to fall, the macro backdrop for the AUD would imply potentially even more weakness.
This simplistic view misses out a lot of important potential drivers, particularly over shorter time horizons…As we have highlighted before, the most obvious of these are some of the key drivers of portfolio flows, including from central banks…As a starting point, we look at why Australia has been such an attractive destination for foreign money:
- Triple-A status in a shrinking pool of similarly rated assets.
- A strong recovery from the Global Financial Crisis, helped by a strong commodity sector, in the face of weakness in other major economies.
- Monetary tightening that generated attractive carry; and even as the RBA has pushed policy rates to 100-year lows of 2.75%, carry has remained positive.
- A central bank that has not viewed AUD strength as a top challenge.
- Following reserve accumulation.
Australia is not about to lose its triple-A rating, but the other drivers of inflows are fading: growth is slowing; the attractiveness of carry is being eroded by rate cuts and, as we go into next year, by possible rate hikes from other central banks…
Bring it.
