CBA Currency forecast update

Transcription

1 FX Insightss CBA Currency forecast update Forecast Update: Turning More Bullish on AUD FX Insights 31 March 2016 Our long-held belief that the USD would peak soon after the Fed lifts interest rates remains in place. The U.S. economy has slowed more than expected following the impact of the % real appreciation in the USD. Australia s economy is doing relatively well and commodity prices are going through a bottoming-out process. Overview Our long-held belief that the USD would peak soon after the Fed lifts interest rates remains in place. However, the actual USD decline has been more dramatic than we expected (chart 1). We nevertheless maintain the central forecast that the USD has peaked in the current cycle, given the visible dampening impact the 19% real appreciation in the Fed s broad USD trade-weighted index since June 2014 has had on the U.S. economy (charts 2 and 3). CBA (Author) Produced by Commonwealth Research based on information available at the time of publishing. We believe that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held or made as at the time of its compilation, but no warranty is made as to accuracy, reliability or completeness. To the extent permitted by law, neither Commonwealth Bank of Australia ABN nor any of its subsidiaries accept liability to any person for loss or damage arising from the use of this report. The report has been prepared without taking account of the objectives, financial situation or needs of any particular individual. For this reason, any individual should, before acting on the information in this report, consider the appropriateness of the information, having regard to the individual s objectives, financial situation and needs and, if necessary, seek appropriate professional advice. In the case of certain securities Commonwealth Bank of Australia is or may be the only market maker. This report is approved and distributed in Australia by Commonwealth Securities Limited ABN a wholly owned but not guaranteed subsidiary of Commonwealth Bank of Australia. This report is approved and distributed in the UK by Commonwealth Bank of Australia incorporated in Australia with limited liability. Registered in England No. BR250 and regulated in the UK by the Financial Services Authority (FSA). This report does not purport to be a complete statement or summary. For the purpose of the FSA rules, this report and related services are not intended for private customers and are not available to them. Commonwealth Bank of Australia and its subsidiaries have effected or may effect transactions for their own account in any investments or related investments referred to in this report.

2 We don t believe the USD will weaken too much given the relatively healthy state of the U.S. economy, the elevated US terms of trade, and the FOMC s intention to further raise interest rates, in contrast to most other central banks. We anticipate the FOMC will re-commence raising interest rates in June and this will generate some mild but temporary re-strengthening of the USD. We don t anticipate the USD will lift to new cyclical highs. One of the most notable features of the global currency market at present is the fact that despite negative interest rates, the currencies of these countries are not depreciating. We believe this is due to the fact that while initial changes in interest rate direction are a large driver of exchange rates, incremental changes in interest rates are a much less significant driver of exchange rates. Hence, a country s current account balance (and other factors) will act as a more dominant driver of the currency s direction, during the period where incremental changes in interest rates are occurring. Countries with current account surpluses typically always have low interest rates. This is because savings remain greater than investment (the definition of a current account surplus). Hence, rather than negative interest rates being a new paradigm, which should help to weaken an exchange rate, negative interest rates are simply an extension of an old paradigm. It is notable that the countries adopting negative interest rates, do not have bond yield differentials to the U.S. that are anywhere near record lows. The bottoming out in global commodity prices appears to be advancing at a more rapid rate than we anticipated, partly assisted by a lower USD (chart 4). We have subsequently revised down our USD forecasts, and revised up our AUD, NZD, EUR and JPY forecasts. We have revised down our GBP/USD forecasts because of the dominant macro-depreciating combination of negative U.K.-U.S. interest rate differentials and a large U.K. current account deficit (4.7% of GDP). Further encouraging us to lower our GBP forecasts is our belief that the current political uncertainty surrounding the outcome of the U.K. s 23 June referendum on E.U. membership will continue to limit GBP upside. USD Outlook Our long-held belief that the USD would peak soon after the Fed lifts interest rates remains in place. However, the actual USD decline has been more dramatic than we expected (chart 1). Perhaps we should not have been too surprised about this. The 19% real appreciation in the Fed s broad USD trade-weighted index since June 2014 has had a visible dampening impact on the U.S. economy. The Atlanta Fed has recently further revised down their forecast for U.S. Q1 GDP to a modest 0.6% (saar). Net exports have subtracted 0.8%pts from U.S. real GDP growth over the last five quarters, and Fed Vice Chairman Stanley Fischer anticipates this subtraction to U.S. real GDP growth will be repeated over 2016 (charts 2, 3 and 5). 31 March

3 We have subsequently revised lower the extent to which we believe the Fed will lift interest rates both in the shortterm and in the long-term. The softening in the U.S. economy since the Fed first lifted interest rates in December means we now believe the Fed will deliver only two further interest rate rises this year, not three. Perhaps we should not have been too surprised about the USD peaking so soon after the Fed tightens rates. Chart 6 shows the performance of the USD broad TWI in the past seven Fed tightening cycles. Apart from the two Fed tightening cycles in 1983 and 1988, the USD either fell or tracked sideways during every other Fed tightening cycle (June 2004, June 1999, February 1994, and December 1986). Chart 6 also illustrates the USD decline during the current Fed tightening cycle (black line). If we dig a bit deeper, we will observe the USD broad TWI demonstrates markedly different performances against the various currencies when the Fed is tightening. We have analysed 27 currencies that currently comprise 97% of the USD broad TWI basket. Chart 7 presents the results: the proportion of months a currency strengthened against the USD above its pre-fomc rate hike level is denoted with a number above 50. The G10 European currencies generally weaken modestly against the USD when the Fed is tightening (blue bars in chart 7). The emerging market currencies in Latin America, Europe, Middle East and Africa (EMEA) generally weaken significantly against the USD (brown and red bars in chart 7). By contrast, the G10 commodity currencies and Asian currencies generally strengthen against the USD when the Fed is tightening (green and black bars in chart 7). 31 March

4 AUD/USD outlook We are bringing forward our long-held forecasts of a cyclical recovery in the AUD/USD exchange rate. There are four main reasons why we see slightly more appreciation in AUD/USD somewhat sooner (1) Australia s economy continues to surprise to the upside. Australia s unemployment rate has declined to 5.8% since peaking at 6.3% in July 2015 (chart 8). The RBA are also forecasting a further decline in the unemployment rate despite an estimated 26% of the mining investment downturn and 45% of the job-related shedding, yet to run its course. For more details please see the link. We anticipate Australia s economy to further accelerate in 2016 and 2017, with Australia s unemployment rate to further decline to an average 5.6% over 2016 and 5.3% over (2) Global commodity prices appear to be in the process of bottoming out. This bottoming-out process is advancing at a more rapid rate than we previously anticipated, partly assisted by a lower USD. The immediate implications of the 50% lift in iron ore prices since mid-december is that Australia s terms of trade will endure a lift in the current March quarter and, we believe, stabilise in subsequent quarters. Australia s terms of trade remains one of the best long-run guides to the AUD and suggestive of good support for the AUD (chart 9). (3) We have revised lower the extent to which we believe the Fed will lift interest rates, both in the short-term and the long-term. The softening in the U.S. economy since the Fed first lifted interest rates in December means we now believe the Fed will deliver only two further interest rate rises this year (not three) and we have 31 March

5 factored this into our estimates of the forthcoming Australia-U.S. two-year bond spread, which is now marginally higher (chart 10). (4) Australia s current account deficit is set to improve over 2016 and As a percentage of GDP, Australia s current account deficit is anticipated to narrow from its current rate of 5.2% of GDP, to average 3.7% of GDP over 2016 and a modest 2.7% of GDP over Two factors driving a structural improvement in Australia s current account deficit are a better trade balance as LNG export volumes increase, and low debt-servicing requirements as interest rates remain historically low. As also indicated on chart 11, Australia s interest rate differentials to the U.S. remain at a cyclical low, but in the context of a structural (and forecast further) improvement in Australia s current account, are supportive of a higher AUD/USD exchange rate valuation. Richard Grace CBA Chief Currency Strategist & Head of International Economics Joseph Capurso CBA Senior Currency Strategist Elias Haddad Senior CBA Currency Strategist Peter Dragicevich Senior CBA Currency & Rates Strategist 31 March

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