Bill Evans: Australian dollar falls delayed

See the latest Australian dollar analysis here:

Macro Morning

Via Bill Evans just now:

We have slightly revised our forecast profile for the AUD/USD following a review of our forecasts for commodity prices.

We now expect that the AUD/USD will hold around AUD/USD 0.77 to June (prior was AUD/USD 0.76) before falling to AUD/USD 0.74 by year’s end (prior AUD/USD 0.72).

We had expected AUD/USD to reach 0.70 by March 2019 before recovering somewhat to AUD/USD 0.72 by September. We now expect AUD/USD to reach 0.70 by September 2019 and to hold around that level to year’s end.

These forecasts broadly reflect our Fair Value model after making some adjustments for our own judgements.

The key drivers behind our views remain in place: a fall in commodity prices through 2018 and 2019; a sharp widening in the AUD / USD interest rate differential and some reversal of the current trend for the USD to weaken against the other majors.

Our commodity price views have been based around the expected slowdown in shadow credit growth in China firstly squeezing commodity speculators who currently hold substantial stocks of iron ore and secondly slowing investment particularly in major transport projects. These projects are typically associated and funded by local governments, usually outside the regulated banking sector.

While these are clear factors which are likely to weigh on prices, China’s  anti-pollution policies have been supporting iron ore and coking coal prices. Smaller higher polluting mines/furnaces have been closed down with  some production moving  to larger more efficient operations. These larger producers have been using a  higher share of quality imported iron ore, effectively holding up import prices despite lower production.

The dominant iron ore exporters – Australia and Brazil – have not been significantly lifting production to take advantage of higher prices and widening margins.

These dynamics are likely to continue to hold up prices for longer than we had previously expected. Nevertheless we expect that over the course of the second half of 2018 and through 2019 the downward pressures associated with a slowing economy and tighter credit conditions will gradually weaken both iron ore and coal prices.

We would also expect some lift in supply from the dominant  exporters over the course of that two year period as margins remain extremely attractive further pressuring prices.

Overall we are expecting a cumulative fall in Australia’s Commodity Price Index (USD terms)  of around 25% between June 2018 and December 2019. That includes around a 6.5% appreciation in the USD Index.

Readers will be aware that Westpac expects a considerable widening in the US / Australia interest rate differential as the FEDERAL RESERVE continues to raise rates and the RBA remains on hold.

Markets move on expectations. Markets are currently pricing in a yield differential between US and Australian overnight rates of negative 45 basis points by end 2018 whereas Westpac expects minus 63 basis points. Markets are expecting a differential of minus 42 basis points compared to Westpac’s forecast of minus 112 basis points by end 2019.

We anticipate that as markets adjust to Westpac’s rate differential outlook there will be further downward pressure on AUD/USD. This “effect” is likely to be more pronounced in 2019 than 2018 with the gap between Westpac’s view and the market widening significantly in 2019.

I still expect slowing China macro to the dominant force in bulks across H2 so see these prices as possible this year.

Houses and Holes
Latest posts by Houses and Holes (see all)


  1. it seems the AUD falls as US stocks get sold off
    US stocks being sold off is being driven partly from higher rates and also that US shares are trading on absurd valuations above the clouds
    It looks like that US shares could have found a top and maybe just being revalued a little lower 10/20% lower in Dow and S&P until a big sell off in the next 2 years
    Seems with US shares being sold off their highs, there is a bid coming back to the USD
    Not sure if flows are going into US treasuries, maybe but selling pressure is a little stronger in bonds pushing yield up to 2.91% today in the 10 year.
    Who knows where US interest rates are going – there are such polar opposite views in the market
    I’d say over shooting is a good argument in the 3% to 3.5% range possibly on the 10 year before deflation sets in and US yields go lower from some level above, MB says negative, other very smart names are saying 1%
    It seems pretty certain that China is slowing so I am not sure about the big late cycle commodity play that Gunlach and company are suggesting
    Looks like US shares lower with a higher USD, lower commodites and contained commodity prices.
    Looks like Iron Ore might top out here at 80 and restrace in 60’s over the next few weeks.
    As all these home loans in AUST go principal and interest the drag will be horrendous on the Australian consumer and put pressure on the AUD lower as RBA is forced to cut rates later this year, once at least I think, maybe twice.
    The AUD is very hard to predict but I think this year might be the year we see 60’s again by end of 2018
    If Iron Ore is in 60’s and with AUS to US yeild spreads going further negative and If DXY bounces back into mid 90’s possibly. 60’s in the AUDUSD this years sounds plausible
    I quite like the new theory that financial markets are now driving main street not the other way around.
    A sell off in financial markets will slow the global economy down.
    As usual seems to be a global guessing game but looks like central banks are on a path to reduce their balance sheets, especially in the US.

      • Arrow
        US shares continue to be sold off
        AUD falls with the US stock market
        I used to be an interbank AUD trader and when I worked New York shift I use to have dow on screen and AUD would follow dow exactly intra day that’s not always but seems to be now following that trend
        Nasdaq hasn’t sold off as much, I think people are deluded that internet stocks aren’t over valued.
        So I don’t think shares are following US yields
        The 10 year US yield is 100% higher than July 16 1.45 to 2.90
        I think players are buying USD and US treasuries so maybe 3% might be the high
        Fed is selling bonds from October at 50 bn per month and maybe their might be enough demand as us shares and property is revalued lower
        I think we are now revaluing assets that are extremely over valued
        What I think is extremely over valued
        US equities especially internet
        Commercial property
        Resi property in Anglo countries that especially are commodity based economies
        Some of the skandi countries
        These countries have also had the China money laundering bid
        US property lower but not as much because their household debt isn’t as high
        Just look at the most indebted sectors
        US corporates US stock market
        Australia households
        Not so much Australian companies and ASX isn’t hugely geared that’s why it’s not being sold off as much
        ASX is over valued on EPS but Australian gov bonds yields are goung much lower s debt deleverages and people will chase yield