Currency experts have had to overcome their pride, and their persistently wayward Australian dollar forecasts, and instead develop a different model for charting the direction of the local currency, as it moves against the US dollar.
Shifting commodity prices and a gap in interest rate spreads are complicating Aussie dollar forecasts, but JP Morgan suggests averaging the likes of major commodity prices and combining a 1Yx3M real yield spread with an existing terms of trade forecast to predict the direction of the currency movements.
Two months ago, JP Morgan had expected the Aussie to sit around US72¢ at the end of the third quarter.
But based on this improved model, Sally Auld and Ben Jarmon, Australian and New Zealand interest rate strategists at JP Morgan, now expect the Australian dollar to trade around the US75¢-US78¢ range in the second half of this year, before trading down towards US72¢ by mid-2018.
“This bearish profile hasn’t been the right one for AUD/USD so far this year,” writes Ms Auld.
“But assuming otherwise would demand faith in persistent low US inflation outcomes, assume no mean reversion in the US dollar, no further moderation in Chinese growth, stable to higher commodity prices and upside risks to the domestic demand story in Australia.”
David Llewellyn-smith is Chief Strategist at the Macrobusiness Fund, which is currently substantially allocated into international assets. If you want to get your money offshore to catch any downdraft in the Australian dollar then fill in your details below and we’ll be in touch.
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