From Paul Dales today:
“It seems as though the RBA won’t seriously consider raising interest rates until the second half of next year at the earliest,” argues Paul Dales, chief Australia economist at Capital Economics.
The Fed might well have hiked two or three more times by then, taking US rates near to three per cent.
“As a result, we suspect that a further widening of the gap between expected interest rates in the US and in Australia will contribute to the Aussie weakening to $0.65 by the end of next year,” said Dales.
Here’s the chart of what the two year spread will look like if the Fed hikes four more times without the RBA moving (let alone being forced to cut, forget hike). It would mean the deepest negative carry into the AUD in its post-float history:
It does not take Einstein to see that the AUD could fall materially next year.
David Llewellyn-Smith is chief strategist at the MB Fund which is long US equities that will benefit from a falling Australian dollar so he is definitely talking his book (or CE is!). Below is the performance of the MB Fund since inception:
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