AUD: No crash Substantial depreciation this year The Australian dollar was flying high for more than a decade. Even earlier this year, the Australian

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1 Helaba Research FX FOCUS 18 July 2013 Australian dollar AUTHOR Christian Apelt, CFA phone: / EDITOR: Claudia Windt PUBLISHER: Dr. Gertrud R. Traud Chief Economist/ Head of Research Landesbank Hessen-Thüringen MAIN TOWER Neue Mainzer Str Frankfurt am Main phone: / fax: / The situation on the FX market has calmed again. The downturn affecting the emerging market currencies is limited for the time being. The biggest loser has been the Japanese yen. After flying high for a number of years, the Australian dollar has been one of the weakest currencies in The commodity boom triggered by China the main driver for the Australian dollar looks to be drawing to a close. The Australian dollar is set to stabilise at its current level for the rest of the year, as the negative factors are unlikely to intensify. However, the downside risks will dominate in the long term. Helaba Currency Forecast Euro performance on a month-over-month basis % vs. euro compared to the previous month (from 06/18 to 07/17/13) 2,0 US Dollar -2,3 Japanese Yen -0,8 British Pound -0,2 Swiss Franc 0,2 Canadian Dollar -0,6 Australian Dollar 1,0 New Zealand Dollar 0,1 Swedish Krona -2,2 Norwegian Krone -1,0 Czech Koruna 0,5 Polish Zloty This publication was very carefully researched and prepared. However, it contains analyses and forecasts regarding current and future market conditions that are for informational purposes only. The data is based on sources that we consider reliable, though we cannot assume any responsibility for the sources being accurate, complete, and up-to-date. All statements in this publication are for informational purposes. They must not be taken as an offer or recommendation for investment decisions. 0,1 0,4 0,8 0,7 0,8 Core currencies Rest of G10 Currencies of emerging markets Sources: Bloomberg, Helaba Research 1,6 2,5 3,8 Hungarian Forint Russian Ruble Turkish New Lira South Korean Won Chinese Yuan Indian Rupee South African Rand Brazilian Real 5,6 Mexican Peso HELABA RESEARCH 18 J UL Y HEL ABA 1

2 AUD: No crash Substantial depreciation this year The Australian dollar was flying high for more than a decade. Even earlier this year, the Australian currency climbed to its highest trade-weighted level for more than a quarter of a century, although it had passed its peak against the US dollar and the euro in 2011 and 2012 respectively. However, the Australian dollar has depreciated significantly in recent months, making it one of the weakest currencies in The commodity boom triggered by China appears to be running out of steam. Does this mean the Aussie is set for a hard landing? The Australian economy is particularly dependent on the export of commodities minerals and ores, coal and agricultural products to Asia. Australian growth has been driven in particular by exports to the prosperous market of China, the country s most important trading partner by some distance. This has been accompanied by higher commodity prices. Since mid-2011, China has seen a slight slowdown in its economic expansion, and the Chinese government is now officially seeking to achieve a reduced growth rate that is less resource-intensive. The former Australian Prime Minister Kevin Rudd, who was recently re-elected, has stated that the Chinese commodity boom is over. Moderate growth in Australia The Australian economy is faced with challenges. Alongside the export economy, growth in recent years has been driven by mining investment in particular. Although even greater expenditure is expected in this area in the near future, there is set to be a substantial slowdown in the longer term. While this flourishing sector has attracted both capital and labour, other areas of the economy have fallen behind. The appreciation of the currency over a number of years had an adverse impact on competitiveness. Private consumption has slowed and unemployment has gradually risen. However, the residential real estate market, which has been relatively weak in recent years, is showing certain signs of recovery. GDP is set to increase by just 2.5 % in Natural disasters aside, Australia is used to growth rates of between 3 % and 4 %. Phase of strong growth in Australia comes to an end Aussie s interest rate advantage relatively modest % % points AUD Reserve Bank still in rate-cutting mode The Reserve Bank of Australia has responded to the slowdown in growth with a more expansionary monetary policy, particularly since inflation of 2.5 % is within the target range. It has reduced the headline rate from 4.75 % (2011) to a record low of 2.75 %. Although further interest rate cuts by the Reserve Bank cannot be ruled out, the depreciation of the currency this year should reduce the pressure for additional measures, especially as some indicators of economic sentiment have improved recently. This means that the Aussie, formerly a high-yielding currency, still has a significant interest rate advantage compared with the US dollar and the euro, which are currently zero-interest. In the longer-term comparison, this yield advantage was even more pronounced, meaning that the Australian currency is still somewhat overvalued based on the respective interest rate differences. HELABA RESEARCH 1 8 J UL Y HELABA 2

3 Difficult environment for commodities, but no slump in prices In the past, the Australian dollar frequently tracked the development of commodity prices. Even if the Chinese boom comes to an end, this certainly does not mean there will be a slump in demand for raw materials, and hence in their prices. The global recession in 2008/09 Australia was one of the few countries to escape the impact led to a downturn in commodity prices and the Australian dollar. Although this underlines the fundamental risks of the currency, the Aussie subsequently enjoyed a strong recovery. In any case, there is little evidence of an impending crash like the one seen following the Lehman collapse. Politicians appear to have the problems affecting the Chinese banking sector under control. Having risen sharply, money market rates on the Chinese interbank market have now fallen again. Commodity prices have probably passed their peak for the foreseeable future, but they remain a long way from an actual slump. There are some more positive developments in the industrialised nations that argue against falling commodity prices; for example, iron ore prices have stabilised. While the Australian dollar resisted the first signs of weakness in commodity prices in 2011/12, the latest depreciation has more than priced in this development. As such, commodities currently suggest that the Aussie will enjoy a certain recovery. Commodity prices more stable than the Aussie of late Index USD % of GDP Current account on the way to improvement Economy as a whole less vulnerable The Australian dollar is considered to be a cyclical currency, and not only because of its dependence on commodity prices. The country traditionally has a substantial current account deficit and hence is reliant on foreign capital. In a nervous financial market environment, this can be problematic and have an adverse impact on the currency. Something of an all-clear signal can be issued in this respect: the current account deficit in 2012 was just 3.7 % of GDP, compared with over 6 % in The Australian trade balance returned to positive territory this year, meaning that the current account should continue to improve. A lower current account deficit also means an increase in national savings. This has been driven in particular by private households, whose savings ratio has increased from zero to more than 10 % of disposable income in just a few years. By contrast, the federal budget is in deficit, albeit at a low level compared with many industrialised nations. Parliamentary elections in Australia are scheduled for September. Following Rudd s return as Prime Minister, the ruling Labour Party has at least given itself some hope of victory. It is rather doubtful as to whether a win for Rudd or the conservative opposition would have a sustained impact on the Australian dollar. HELABA RESEARCH 1 8 J UL Y HELABA 3

4 Substantial short sale positions as a counter-indicator USD % of open interest USD Australian dollar remains overvalued in the long term Stabilisation, but long-term risks Following its depreciation, the outlook for the Aussie over the coming months is not too bad: the Australian economy is continuing to grow, interest rates are higher, and public finances are healthier than in many other industrialised nations. In any case, there is unlikely to be a further downturn in commodity prices. In addition, there are substantial speculative bets against the Australian currency on the futures markets, which can be seen as a counter-indicator; after all, these positions have to be covered at some point. As such, the Australian dollar is likely to leave behind its temporary low and recover slightly. This year, it could appreciate against the US dollar from the current level of a little more than 0.90 to 0.95, while the EUR-AUD exchange rate is likely to decline from a above 1.40 towards 1.30 as the end of the year approaches. In the longer term, the exchange rate risks concerning the Australian dollar will dominate: the Chinese commodity boom looks like it has come to an end, and despite the losses, the Aussie is still considered to be overvalued against the euro and the US dollar based on purchasing power parity. HELABA RESEARCH 1 8 J UL Y HELABA 4

5 Helaba Currency Forecasts vs. Euro (vs. Euro, %) Performance Forecast horizon at end... year to date 1 month current* Q3/2013 Q4/2013 Q1/2014 Q2/2014 US Dollar 0,5 2,0 1,31 1,30 1,25 1,25 1,20 Japanese Yen -12,4-2, British Pound -5,9-0,8 0,86 0,85 0,85 0,85 0,84 Swiss Franc -2,2-0,2 1,24 1,30 1,25 1,25 1,25 Canadian Dollar -4,1 0,2 1,37 1,34 1,29 1,29 1,25 Australian Dollar -10,7-0,6 1,42 1,37 1,32 1,34 1,32 New Zealand Dollar -4,1 1,0 1,66 1,63 1,56 1,56 1,52 Swedish Krona -0,4 0,1 8,62 8,60 8,50 8,40 8,30 Norwegian Krone -6,6-2,2 7,86 7,70 7,50 7,40 7,20 vs. US-Dollar (vs. USD, %) Japanese Yen -12,9-4, Swiss Franc -2,7-2,2 0,94 1,00 1,00 1,00 1,04 Canadian Dollar -4,7-1,9 1,04 1,03 1,03 1,03 1,04 Swedish Krona -1,0-1,9 6,57 6,62 6,80 6,72 6,92 Norwegian Krone -7,1-4,2 5,99 5,92 6,00 5,92 6,00 1,57 US-Dollar vs. (vs. USD, %) British Pound -6,4-2,7 1,52 1,53 1,47 1,47 1,43 Australian Dollar -11,1-2,6 0,92 0,95 0,95 0,93 0,91 New Zealand Dollar -4,6-1,0 0,79 0,80 0,80 0,80 0,79 * Sources: Bloomberg, Helaba Research HELABA RESEARCH 1 8 J UL Y HELABA 5