AUD/USD Exchange Rate Outlook

Transcription

1 AUD/USD Exchange Rate Outlook Richard Grace Chief Currency and Rates Strategist & Head of International Economics +(612) richard.grace@cba.com.au February 215

2 Outlook for AUD/USD Exchange Rate AUD/USD is likely to further depreciate to.73 by end-june 215 for five main reasons (1) Lower commodity prices - supply-driven declines in Australia s commodity export prices, are applying downward pressure to Australia s terms of trade. (2) Narrower Australia-US interest rate differentials low global and Australian inflation, a weak domestic economy and a terms of trade driven contraction in Australia s real gross domestic income is generating AUD/USD EXCHANGE RATE Recent Ten-Year Average downward pressure on Australian swap rates. At the same time, an improving US economy and guidance from the FOMC is generating mild upward pressure on US short-term swap rates (3) Slower Chinese growth, lower Asian inflation, rates and currencies, which are applying downward pressure Average.74 AUD /USD (rhs) Dec-83 Oct-94 Aug-5 Jun-16 (4) A stronger USD in response to a higher US terms of trade, and the prospect of higher US interest rates. (5) Cross-rate pressure - from a large USD bid in the global foreign exchange market. 2

3 Importance of Global Growth Revisions Should Not be Underestimated IMF revisions to global growth should be taken note of. 3

4 Commodity Prices Lower Led by Increases in Supply AUD being used as a proxy for lower commodity prices and because export prices falling. 8 %pa GLOBAL OIL BALANCE (annual % change) AUD 1.25 AUD/USD & RBA COMMODITY Index PRICE INDEX 14 Demand 1.9 AUD/USD (lhs) Supply.93 RBA Commodity Price Index (SDR Terms) rhs Average Jan-4 May-6 Sep-8 Jan-11 May-13 Sep Jan-86 Jan-91 Jan-96 Jan-1 Jan-6 Jan-11 Jan-16 4

5 Lower Global Commodity Prices Impact Australia s Terms of Trade The Australian terms of trade effect is a major driver of interest rates and especially AUD 13 AUD/USD & AUSTRALIA'S TERMS OF TRADE AUSTRALIA GDP AND INCOME GROWTH Australia Terms of Trade Index (lhs) AUD /USD (rhs) Mar- Jul-3 Nov-6 Mar-1 Jul-13 Nov Difference between Real Gross Domestic Income and Real GDP Growth YoY% (lhs) RBA Cash Rate (rhs) -5.. Mar-2 Feb-5 Jan-8 Dec-1 Nov-13 Oct

6 Australia s Domestic Economy Weak and Australia-US Rates Narrowing US economy firming. Australia-US two-year bond spread currently at 132bpts AUSTRALIA GDP GROWTH % % Annual % Change Domestic Demand 8 8 % AUD/USD & AUSTRALIA-US TWO-YEAR BOND SPREAD Australia-US Two-Year Bond Spread (lhs) GDP Net Exports (contribution) -4 Mar- Dec-3 Sep-7 Jun-11 Mar AUD/USD (rhs) 15 Bpts Pivot Level Mar-92 Jan-97 Nov-1 Sep-6 Jul-11 May-16 6

7 AUD Maintains a Very Strong Correlation to Asian Currencies Asia inflation falls, Asian rates decline and currencies depreciate. AUD also declines. AUD AUD & NON-JAPAN ASIA (against USD) AUD/USD (lhs) Pts ASIAN CURRENCIES AND ASIA INFLATION ADXY - Non-Japan Asia Currency Basket vis-a-vis USD (lhs) 8 6 ADXY Currency W eights RMB 41.2 KRW 12.9 SGD 9.4 INR 9.3 HKD 8.6 TWD 5.6 THB 4.9 MYR 4.1 IDR 2.7 PHP 1.3 Total ADXY - Weighted Non-Japan Asia Currency Basket against USD (rhs) Asian Inflation (rhs) GDP-Weighted 11 Country Index 2.5 Jan-6 Jan-8 Jan-1 Jan-12 Jan Mar-5 Mar-7 Mar-9 Mar-11 Mar-13 Mar-15 7

8 China s Interest Rate Cut and Growth Challenges China interest rate cut due to lower inflation and a slowing economy. % CHINA SELECTED INTEREST RATES Benchmark One-Year Lending Rate (lhs) Reserve Requirement Ratio (RRR) (rhs) % USD/CNY DAILY Mid-FIX and USD/CNH (Historical Spread) Positive CNH-CNY Mid-Fix Spread Reflecting Expectations of a Weaker RMB (rhs) USD/CNH (lhs) Two-Year Bond Yield (lhs) Benchmark One-Year Deposit Rate (lhs). Apr-7 Sep-8 Feb-1 Jul-11 Dec-12 May-14 Oct USD/CNH Daily Mid-Fix (lhs) Negative CNH-CNY Mid-Fix Spread Reflecting Expectations of a Stronger RMB (rhs) 6. Jun-13 Nov-13 Apr-14 Sep-14 Feb-15 Jul

9 China Capital Outflows Alarming; But Global Demand for A$Bonds Firm China capital outflows worth watching. Otherwise global demand for A$ bonds is healthy CHINA'S BALANCE OF PAYMENTS (% GDP, 4Q SUM) Financial + Capital Account Current Account A$bn FINANCING AUSTRALIA'S CURRENT ACCOUNT DEFICIT (rolling 4Qtr sum) Current Account Deficit (inverted) Equities Government (Foreigners Buying A$ Bonds) A$bn Reserves -15 Dec-99 Aug-2 Apr-5 Dec-7 Aug-1 Apr Banks Other Flows Other Sectors Note: Bank flows include derivative, excludes reserve asset flows Dot Com Bust US Recession Global Financial Crisis Eurozone Crisis China Slowing etc. 9

10 How Much Further Should AUD Depreciate? Australia s real exchange rate too high because Australia s decline in inflation is lagging Index 23 AUSTRALIA TWI NOMINAL & REAL Index 12 SELECTED INFLATION RATES BASE 1 = Q3 211 (PEAK in AUD) Real TWI (lhs) Australia Nominal TWI (rhs) 7 4 Jun-7 Aug-79 Oct-88 Dec-97 Feb-7 Apr US Asia 2 2 Eurozone Sep-11 Dec-12 Mar-14 Jun-15 Sep-16 Dec-17 The Australian dollar remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy. RBA Statement 3 February 215 1

11 Partial Disconnect between AUD/USD and TWI Reflects impact of USD strength and very low interest rates in other economies 74. AUD/USD & AUSTRALIA TRADE-WEIGHTED INDEX JAPAN, UK, EUROZONE & US TWO-YEAR BOND YIELDS Australia Trade- Weighted Index (lhs) US Two-Year Bond Yield Japan Two-Year Bond Yield UK Two- Year Bond Yield AUD/USD (rhs) Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Eurozone -.25 Two-Year Bond Yield -.25 Aug-11 Nov-12 Feb-14 May-15 It is helpful to remember AUD cross rates (AUD/EUR, AUD/GBP, AUD/JPY, etc.) can t remain stretched for too long. The impact of a firming USD in the global foreign exchange market eventually works to bring AUD cross rates back to fundamental value. 11

12 USD Multi-Year Upward Trend Remains Firmly in Place At best the USD could consolidate for a period. But multi-year upward trend is intact. Index LONG RUN USD CYCLES Source: JP Morgan/FRB US REAL BROAD TWI (Peak=1) Jan-7 to Mar 85 Feb-2 to Current Index USD & REAL TWO-YEAR SWAP SPREAD US-Major Currency Real Two-Year SwapSpread (lagged 4 Months) lhs USD TWI (Major Currency) rhs Signifies end of depreciation cycle Mar-85 to Feb Jan-6 Jul-7 Jan-9 Jul-1 Jan-12 Jul-13 Jan Months from peak 12

13 USD Lift in US Terms of Trade is USD Supportive Lower commodity prices tend to lift the US terms of trade because US is net oil importer US TERMS OF TRADE & USD USD Major Currency TWI (rhs) USD 2 bn US TRADE BALANCE (Annual US$b) Trade Deficit (ex.energy) USD 2 bn USD Terms of Trade (lhs) 92 Dec-8 Dec-87 Dec-94 Dec-1 Dec-8 Dec Energy Trade Deficit (ex. gas) Gas Trade Balance -8 Jan- Jan-3 Jan-6 Jan-9 Jan-12 Jan

14 Major Observations and Risks Observations (1) Markets are likely to remain range-bound until we get some fresh direction from the FOMC. - ECB unlikely to announce fresh policy easing; BoJ unlikely before end-april; BoE on hold. - The ball remains in the FOMC s court to decide near-term USD direction/correction. (2) Developments in Greece remain volatile but is unlikely to result in another Eurozone Crisis. (3) History suggests we will get another emerging market event within 12 months of Fed tightening. Risks to AUD/USD Outlook (1) Fed doesn't raise interest rates in 215 and USD softens. (2) Australia s commodity export prices lift and generating a rise in Australia s terms of trade. (3) China s economic growth slows more than anticipated. 14

15 Some Long-Run Considerations on Commodity Prices REAL COMMODITY PRICES OVER THE LAST 214 YEARS 15

16 Forecasts Exchange Rates Current End-Period Forecasts 11-Feb-15 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Majors AUD EUR JPY GBP CA D NZD CHF AUD Cross Rate s A UD-NZD A UD-EUR A UD-JPY A UD-GBP A UD-CA D A UD-CHF A UD-CNY A UD-SGD Australia TWI Current End-Period Forecasts 11-Feb-15 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Selected Cross Rates EUR-JPY EUR-GBP EUR-CHF Selected Global-Quoted Cross Rates EUR/A UD GBP/AUD EUR/NZD GBP/NZD Non-Japan Asia Countries USD-CNY USD-SGD USD-HKD USD-THB USD-IDR 12,75 13, 13, 12,5 12,5 12, USD-TWD USD-KRW 1,97 1,125 1,15 1,1 1,1 1,1 USD-MY R USD-VND 21,335 22, 22, 22, 22, 22, USD-PHP USD-INR

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