Westpac: Australian dollar falling to 70 cents

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Via Westpac:

Following a decisive shift down from USD0.78, during April-May, the Australian dollar has flirted with the USD0.75 figure on a number of occasions, but has been unable to sustain a break below. This has been despite a significant (if short-lived) bout of political instability in Europe and a continuation of the US dollar uptrend. The question to ask is whether this stability is evidence of a low being found, or if it is instead merely a pause for breath in a longer downtrend. We continue to argue the latter, believing that the Australian dollar will inevitably lose altitude to USD0.72 by March 2019, and thereafter test USD0.70 in the second half of 2019. This view comes as a consequence of our expectations for the US and commodity prices.

First to the US, although the headlines have been dominated by global trade tensions and the US/North Korea summit, the key story for the USD is the economy’s persistent underlying strength. As at March, annual GDP growth stood at 2.8%yr, a full percentage point above potential (1.75%yr). The partial data for Q2 and the locked-in fiscal impulse to come imply that this momentum will strengthen through the remainder of 2018 and into early 2019, with annual growth averaging around 3.0%yr over the period. The labour market is also consistent with this picture – with employment growth already well in excess of population growth the unemployment rate is continuing to trend lower. Rising participation amongst prime-aged workers will limit wage pressures in 2018, but an unemployment rate heading towards 3.5% (currently 3.8%) will see wage and inflation expectations strengthen over that period.

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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.