Westpac, ANZ: Australian dollar to fall as RBA cuts more than Fed

See the latest Australian dollar analysis here:

Macro Afternoon

Via Bill Evans today:

Data supports our view of need for August and November cash rate cuts following June decision. FOMC to act in September and December.

Developments since the RBA rate cut on Tuesday 4 June have provided us with further confidence that our forecast for three rate cuts in 2019 will prove accurate. Firstly, the Governor has pointed to an ambitious objective for the labour market, with an unemployment rate of 4.5% seen as necessary to bring inflation back to target. This is despite his own forecasts indicating a 5% result on the basis of two rate cuts. That challenge can certainly be interpreted as an expectation of the need to deliver more than just two rate cuts.

Our earlier discussion on 24 May around our target cash rate of 0.75% emphasised downside risks to the cash rate, but noted the difficulties in lowering the cash rate below 0.5% and providing some pass through to the general economy – except for the impact on the currency. We concluded that 0.5% could be the lower bound for the cash rate, although we are comfortable with our 0.75% target. The Governor considered international precedence and referred to the 0.25-0.50% seen in the US, UK and Canada, but did not indicate whether the same level would be effective for Australia.

The other significant development since the RBA meeting has been the disappointing GDP report for the March quarter. This again highlighted the key themes that have been most prominent in our consistent assessment that the Australian economy is likely to continue operating well below potential, namely weak household income growth, a cautious consumer and a turning point in the savings rate.

This report, showing that GDP growth was only 0.4% in the March quarter is likely to trigger a further downward revision to the RBA’s 2019 GDP forecast. Westpac has consistently forecast around 2.2% for GDP growth in 2019, while the RBA has recently lowered its forecast from 3% in February to 2.75% in May (2.6% to 1 decimal point), with a likely further downward revision in August.

We have also argued that it will be difficult to retain the 1.75% underlying inflation forecast for 2019 by August when, as we expect, the June quarter underlying CPI will print 0.4% for a total of 0.7% for the first half of the year. We think it will be important that when the RBA addresses these lower forecasts, it responds with a further rate cut in August and another one to follow in November.

There has been some speculation that the RBA may cut earlier in July. This is not our central view given the likely need to respond to these downward revisions in August.

Turning to the US, we have revised our federal funds rate profile to include two cuts of 25bps in September and December this year.

A key influence on this assessment is that a new variable has entered the US economic model – one labelled “political unpredictability”. This variable is certain to have a negative coefficient on any equation describing US investment decisions and general confidence. We believe that it is now so embedded in US business behaviour that even resolutions of the current trade controversies are unlikely to convince business that the coast is clear.

We expect the FOMC will be assessing current risks in a similar fashion, revising down central growth views, particularly around business investment and confidence, and widening the uncertainty bands around these views. Chair Powell has recently pivoted from his previous “patient” stance to one where he is prepared to act and it is likely that the FOMC are seeing this variable as part of their risk assessment.

At this stage, we are not franking market pricing by extending the rate cuts into 2020 as we expect some reasonable resolutions to the current crises to prevent a ‘worst case’ scenario, particularly for the US consumer. Failure to resolve these issues would lead to a considerable shock to household disposable income and household demand. That development, of course, would require further action from the FOMC than we are currently forecasting. In 2020, with the consumer remaining in reasonable shape, we would also expect the housing market, which has currently stabilised, to respond to this lower profile for interest rates.

With markets currently pricing in more extensive cuts than we are forecasting, we see little scope for further declines in US yields in 2019, and anticipate they will rise modestly through 2020.

Given that markets are still not fully pricing in our RBA view by the end of 2019 and are more aggressive on the profile for federal funds rate cuts, we are comfortable to retain our central forecast that the AUD drifts down to USD 0.66, albeit reaching that level in the first half of 2020 rather than late 2019.

Also from the ANZ which still sees the AUD falling to 0.65 later this year:

The RBA has begun a fresh easing cycle, and we now expect the Fed to follow suit, despite respectable levels of growth in the US. We expect that AUD rates will out-perform and the Australian rate structure will remain below the US for the foreseeable future.

I still think that the AUD will be biased higher in the short term but, equally, do not expect it to get very far before reversing.

Latest posts by David Llewellyn-Smith (see all)


    • If you’re going to impersonate LSWCHP, try to get the acronym right.

      Also watch out because he has guns!

      • No stress! Credit due.

        Also, are there two members called Andrew on this site?

      • – Perhaps he/she doesn’t want to impersonate ………………………

      • There are a couple of other Andrew’s. I think one is a member and the other isn’t.
        I normally just comment on HnH’s overnight commentary but occasionally on some other economic/financial matter.

      • @Andrew.
        It would be very unusual and bad web design if the MB website allowed duplicate user names. That is my polite way of saying I don’t think it happens. Very close user names…yes, see LSWHCP issue above (although it should be easy to prevent that using heuristic algos).
        So. Sorry. I reckon if the user name is Andrew and it’s not subtly altered to be similar but not same, then it’s you

  1. – I actually think the AUD will go higher. And there are a number of good reasons for that:
    A) We’re currently running a Trade Surplus as a result of a “weakening” uassie economy and rising/high iron ore prices.
    B) The Current Account Deficit is melting away fast.
    – The question is how long will those high iron ore prices last (think: China, Brasil)
    – I also think that short term aussie rates will fall much more than US rates. Since the FED & RBA both follow short term rates I expect the RBA to cut at least 2 times, perhaps even more. And falling short term rates are a sign of a weakening economy.

    • There’s a lot riding on current very high commodity prices in there.

      If they fall fast (not saying they will) then the AUD will slip but also GDP will get caned (exports are one if the only positives at the moment) which could double the downdraft…?

      • – Agree. The Trade Surplus is/could be only temporary, as long as iron ore prices remain high.
        – But don’t overlook our weakening economy. That will squeeze imports.

    • DominicMEMBER

      Falling Aussie rates should make the AUD weaker not stronger — the reason the AUD is stronger right now is because of the decent terms of trade (thanks Iron Ore), the LNP being re-elected and their ‘business/investment-friendly’ policies and the fact that AUD money supply growth is weak (relative to other countries).

      If credit growth catches fire again and Iron Ore prices recede you could see the AUD weaken quite sharply, esp. in tandem with several rate cuts.

      • That’s what I’m waiting for. If only Brazilians weren’t apparently so dam incompetent.

      • – The change from Deficits to Surplusses (Trade + Current Account) will be rewarded by falling long term rates
        – Short term rates is a different story.

  2. The whole situation is preposterous of course.
    The RBA has to continually lower the cash rate to save the banks from insolvency.
    Perhaps the banks have not been well served by their senior economists.

    • DominicMEMBER

      The insolvency issue will arrive as a result of a material deterioration of the asset portfolio, so yes, to the extent that lower rates might prop up property prices then you are right. If property prices continue to tank despite lower rates then there could be trouble. What really matters is how honest the banks are about revaluing their mortgage portfolios.

      In the US they ‘solved’ the problem by allowing the banks to use internal models to value the assets on balance sheet i.e. they had a free pass to make it all up.

      • Yes Dom.
        The only thing that stops me going as crazy as the Bill Evans world is knowing that all this nonsense about not facing up to responsibilities and constant postponement of the inevitable fall, is the knowledge that gold will have to be revalued to just as crazy an amount to balance all the debt.

      • Jumping jack flash

        pfft.. “internal models”

        Banks blocked the sale (revaluation) of houses that were in trouble. Repossessions. All that kind of thing. It wasn’t pretty.

        Before that happened there was a spate of shrewd people who started buying up distressed mortgages for cents on the dollar. This started to gain popularity in the worst affected areas and the banks had to move to stop it. Panic selling. That kind of thing. That’s not good for banks where the only measure of risk for trillions of debt dollars is the assets they are attached to.

        Even now there are banks with houses still on their books that are still valued at their 2006/7 prices. Those houses will never be sold because they’re worthless, but they have debt attached to them that can’t be written off, at least not all in one go. They’re called REO or Real Estate Owned properties, the banks own them.

  3. FED rate is 2.25% so FED will definitely cut more than RBA that has only 1.25% left.
    That doesn’t mean USD will gondown because USD rules when global recession hits

  4. Jumping jack flash

    Ah yes, the magical rate cuts somehow boosting employment and inflation.

    I wonder how that may be? Through what diabolical mechanism can lower rates (cheaper debt) have on employment and inflation? I’m sure these mental giants with brains the size of planets have used every fibre of their intellect to arrive at this brilliant, economy-saving move.

    Well, I can see how it may boost inflation by lowering the dollar, but boosting employment?
    All I can say is there must be a lot of really stupid employers around if they borrow money to pay the wages of new positions in an economic environment such as it is.

    Fortunately, businesses won’t do that. The only reason you borrow money is to buy houses, isn’t it? Business owners are tapped out on debt. Most of them couldn’t afford to pay extra positions, even when debt is really cheap.

    They’re flat out trying to get rid of as many people as possible, and substitute the remaining workers with cheap imports to pocket the difference in the name of debt.

    Cheaper debt will only exacerbate this effect.