ANZ FX: AUD suffers the perfect storm
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1 Economics & Markets ANZ FX: AUD suffers the perfect storm Range of AUD/USD0.82 to AUD/USD0.88 anticipated in 2008, and moving lower in September 2008 Authors: Amy Auster Head of Foreign Exchange and Amy.Auster@anz.com Tony Morriss Senior Currency Strategist, Foreign Exchange and International Economics Anthony.Morriss@anz.com Amber Rabinov Foreign Exchange and Amber.Rabinov@anz.com Our Vision: For Economics & Markets to be the most respected, soughtafter and commercially valued source of economics and markets research and information on Australia, New Zealand, the Pacific and Asia. The run of the US dollar The incredible rise of the US dollar over the past six weeks has longer-term implications for the Australian dollar. We are revising our currency forecasts to account for this major shift in the market, and have moved down our expectations for the AUD/USD exchange rate from a previous forecast of AUD/USD0.90 or above by December 2008, to AUD/USD0.86 for year-end. There is more downside risk to this forecast than potential upside. We are forecasting a year-end exchange rate that is above the current trading range of AUD/USD , because we believe current levels represent an unstable overshoot of fair value (which we currently estimate at AUD/USD0.89). As a result, we do expect some AUD recovery in the coming weeks. Nonetheless, the AUD has traded at a significant discount and/or premium to fair value before, so there is a possibility that the expected recovery does not occur. Most major currencies have experienced sharp depreciation against the USD in recent weeks, but for the AUD/USD to collapse by 17.5 US cents in just 8 weeks is the equivalent of a freak wave in its 25-year history. The fall in oil and gold prices (off 21% and 17%, respectively) and downshift in local rates expectations has exacerbated the AUD s fall. Although a retracement from the big sell-off seems probable, the AUD has blown through so many major support levels on the way down that seems more likely than not that the AUD will be capped below AUD/USD in the coming months. Support is seen at AUD/USD0.80, but is more fragile given recent moves. Figure 1: AUD/USD: An unprecedented move AUD/USD Source: ANZ The past several months have served as a reminder that although the AUD is the fourth most traded currency globally, it features higher volatility than the other majors. The AUD/USD rate over the course of a single year has gone up and/or down by AUD/USD on average over the past 10 years (an 18.4% move versus the average level of the currency). In 2008 alone, the AUD/USD rate has traded in a 17.5 US cent range (19%) in contrast to 16.5 US cents (10.8%) for the EUR/USD, 27 US cents (13.8%) for GBP/USD and 15.5 Yen (14.7%) for the USD/JPY.
2 The changing fortunes of the USD The rocketing USD has led many to ask whether we are at the start of a longterm rally for the US dollar. Our view is that the US dollar is starting to recover, which it must in light of its recent extreme, historic low of 71.5 for the USD trade-weighted index (TWI). The recovery should continue in 2009 and 2010, but the USD at this stage is not forecast to regain its previous highs. Put another way, the USD is starting a cyclical recovery, but from a structural point of view may remain weaker against other currencies over the course of this next business cycle. Our forecast is for the TWI to peak at 90 in late 2010, representing EUR/USD1.20 and GBP/USD1.70. This is somewhat below the TWI s long-term average of 101, and well below the 2002 peak of 120, or the 1985 peak of 160. The lack of faith in the USD is based upon the fundamental view that the US economy is unlikely to rebound quickly from the pending consumption recession. On our forecasts, the Fed funds rate does not return to a neutral setting of 4.5% until late Perhaps more importantly, we believe there may be more diversification of financial flows away from the US caused by the attraction of rapidly developing markets elsewhere, and the reputational and regulatory damage exacted on US markets by the tech wreck, Enron collapse and credit crisis. The EUR is the first major competitor the USD has ever seen as the Euro zone has potential to generate a high share of the global financial stock, and is now a major trade partner for emerging market countries. It all adds up to a bigger role for the EUR as a benchmark currency in our globalised world. Outlook for AUD Just as the USD is not expected to reach previous highs, we do not think the AUD/USD will descend to the deep lows of previous cycles. Commodity prices should support the AUD well above the 2001 trough of AUD/USD0.49; we have the AUD falling to AUD/USD in 2010 before rising again in Nonetheless, the recent big swings in the market argue for a fair degree of caution around any forecasts. The below chart shows results of the Reuters forecast poll taken in August, and highlights how the median market forecast for AUD/USD over the next 3-6 months have moved down by 7-8 cents from the July poll. The 12-months ahead forecasts feature a very wide range. Figure 2: AUD: Wide range for future expectations Old median - July survey ANZ Forecast Market di Spot +1mth +3mth +6mth +12mth Source: Reuters, ANZ Page 2
3 Risks to the forecast The extreme movements in the FX markets reflect great uncertainty over the global growth outlook. Bears are convinced that the credit crisis has brought the global economy to the verge of a downturn not seen since the Great Depression. Bulls believe China will turn a G7 recession into a very soft global landing. ANZ s view is in the middle of these extremes. We expect global growth to slow to trend, as growth in Asia softens while the US and EU falter. Oil prices are forecast to fall to US$95/bbl early next year and the Australian economy is forecast to slow down, but avoid recession. The AUD is at the pointy end of this debate. On the one hand, Australia is a fully developed economy that has been enjoying a robust boom in housing and personal credit funded in part by foreign capital inflows that have dried up in the wake of the credit crisis. With funds now more expensive, Australian households that increased their debt exposure over the past several years are cutting back. In this, Australia is experiencing some elements of the US- UK credit crunch. On the other hand, Australia is unique among OECD countries as a significant exporter of hard commodities Moreover, China is a major export market for these commodities, and demand in China remains robust. The massive terms of trade boom that Australia continues to experience provides a cushion from tighter credit conditions, in the form of persistently higher gross domestic income. The two key variables that drive the Australian dollar commodity prices and interest rates are being pushed and pulled, and their path over the next six months determines the outcome for AUD. Road map turns to watch for in the period ahead The key factors to watch in terms of the AUD outlook are as follows: Oil prices. Oil prices are important for two reasons. First, the price of oil is a benchmark for global commodity prices. The price of oil over the past few years has had a big impact on the price of gold, which in turn goes through periods of very high correlation with the AUD. Second, oil prices tend to have an inverse relationship with the US dollar when oil prices rise, the US dollar falls and vice-versa. If oil prices surge above US$120/bbl again for WTI in the coming months, this is a very bullish signal for the AUD and would suggest the AUD/USD could surge past However, if oil prices continue to plummet past US$100/bbl down toward US$80/bbl, the fall past AUD/USD0.80 could be closer at hand than our forecasts suggest. The US dollar. Even if oil prices remain around present levels in the coming months, the USD could see additional movement due to economic or political events in the United States. Feasible scenarios that could cause the US dollar to give up its recent strength include: renewed equity market weakness; further problems in the financial system; and another leg down in US economic growth that would prompt the Federal Reserve to cut interest rates further. Since the USD is priced relative to other currencies prospects, a better-thanexpected economic outturn in the EU could cause the EUR to strengthen at the expense of the USD, and thereby support the AUD. On the other hand, if US economic data continues to surprise on the upside and the US avoids a recession, this is USD-positive and AUD-negative relative to our forecasts. The EUR is the main variable to watch here. A lift past EUR/USD1.49 would be a negative signal for the USD, whereas a descent below EUR/USD1.40 would imply a more rapid USD recovery than we are currently anticipating. Domestic interest rates. This is the superhighway for the AUD the road that really matters. The importance of the RBA s shift from a hawkish stance on interest rates in July to cutting the cash rate in September in terms of the AUD s recent performance cannot be overstated. At present, the futures markets implies expectations of a further 75 bps cuts to the RBA cash rate in the coming 6 months. ANZ s forecast is for a more gradual reduction, with the RBA forecast to cut rates in November and then remain on hold until May. Should economic data or external circumstances cause the interest rates markets to change its expectations on the path of future interest rates significantly in either direction, the impact on the AUD would be substantial. Watch this space, and the data. Page 3
4 Exchange Rate Forecasts Current Sep-08 Dec-08 Mar-09 Jun-09 Dec-09 Australia and New Zealand FX Crosses AUD/USD NZD/USD AUD/JPY AUD/EUR AUD/GBP AUD/NZD AUD/CAD AUD/CHF AUD/CNY ATWI International FX Crosses USD/JPY EUR/USD EUR/JPY GBP/USD EUR/GBP USD/CAD USD/CHF DXY Asian FX Rates USD/CNY USD/HKD USD/IDR USD/INR USD/KRW USD/MYR USD/PHP USD/SGD USD/THB USD/TWD USD/VND Pacific FX Rates PGK/USD FJD/USD WST/USD Page 4
5 Contacts ANZ Economics & Markets Saul Eslake Fiona Allen Chief Economist Business Manager Saul.Eslake@anz.com Fiona.Allen@anz.com Tony Pearson Mark Rodrigues Julie Toth Paul Deane Deputy Chief Industry and Strategic Industry and Strategic Industry and Strategic Rural and Regional Economist Tony.Pearson@anz.com Mark.Rodrigues@anz.com Julie.Toth@anz.com Paul.Deane@anz.com Warren Hogan Katie Dean Riki Polygenis Dr. Alex Joiner Head of Australian Economics and Interest Rates Interest Rates Interest Rates Interest Rates Warren.Hogan@anz.com Katie.Dean@anz.com Riki.Polygenis@anz.com Alex.Joiner@anz.com Patricia Gacis Jason Hill Strategist, Markets Credit Analyst Interest Rates Patricia.Gacis@anz.com Jason.Hill@anz.com Amy Auster Tony Morriss Jasmine Robinson Amber Rabinov Head of Foreign Exchange and Senior Currency Strategist, Foreign Exchange and Foreign Exchange and Foreign Exchange and Amy.Auster@anz.com Tony.Morriss@anz.com Jasmine.Robinson@anz.com Amber.Rabinov@anz.com Mark Pervan Amber Rabinov Doug Whitehead Natalie Robertson Head of Commodities Commodities Soft Commodity Strategist Graduate Analyst Mark.Pervan@anz.com Amber.Rabinov@anz.com Doug.Whitehead@anz.com Natalie.Robertson@anz.com Paul Braddick Ange Montalti Dr. Alex Joiner Jasmine Robinson Stephanie Wayne Head of Property and Financial System Property and Financial System Property and Financial System Property and Financial System Analyst, Property and Financial System Paul.Braddick@anz.com Ange.Montalti@anz.com Alex.Joiner@anz.com Jasmine.Robinson@anz.com Stephanie.Wayne@anz.com Paul Gruenwald Ivy Tan Tamara Henderson Joshua Saldanha Chang Wei Liang Head of Asian Economics, Singapore Associate Director, Credit, Markets Asia Director, Currency and Rates Strategy, Markets Asia Associate Director, Macroeconomics, Markets Asia Intern, Markets Asia Paul.Gruenwald@anz.com Ivy.Tan@anz.com Tamara.Henderson@anz.com Joshua.Saldanha@anz.com WeiLiang.Chang@anz.com & Information Services Mary Yaxley Marilla Rough Manesha Jayasuriya Head of & Information Senior Information Officer, R&IS Information Officer, R&IS Services Mary.Yaxley@anz.com Marilla.Rough@anz.com Manesha.Jayasuriya@anz.com ANZ New Zealand Cameron Bagrie Khoon Goh Philip Borkin Steve Edwards Kevin Wilson Chief Economist Senior Economist Economist Economist Rural Economist Cameron.Bagrie@anz.com Khoon.Goh@anznational.co.nz Philip.Borkin@anznational.co.n z David Croy Strategist, Interest Rate Strategist David.Croy@anz.com steve.edwards@anznational. co.nz TTKevin.Wilson@nbnz.co.nz Page 5
6 Important Notice Australia and New Zealand Banking Group Limited is represented in: AUSTRALIA by: Australia and New Zealand Banking Group Limited ABN th Floor 100 Queen Street, Melbourne, Victoria, 3000, Australia Telephone Fax UNITED KINGDOM by: Australia and New Zealand Banking Group Limited ABN Bank Street, Canary Wharf, London, E14 5EJ, United Kingdom Telephone Fax UNITED STATES OF AMERICA by: ANZ Securities, Inc. (Member of NASD and SIPC) 6th Floor 1177 Avenue of the Americas New York, NY 10036, United States of America Tel: Fax: NEW ZEALAND by: ANZ National Bank Limited Level 7, 1-9 Victoria Street, Wellington, New Zealand Telephone This document ( document ) is distributed to you in Australia and the United Kingdom by Australia and New Zealand Banking Group Limited ABN ( ANZ ) and in New Zealand by ANZ National Bank Limited ( ANZ NZ ). ANZ holds an Australian Financial Services licence no and is authorised in the UK by the Financial Services Authority ( FSA ). This document is being distributed in the United States by ANZ Securities, Inc. ( ANZ S ) (an affiliated company of ANZ), which accepts responsibility for its content. Further information on any securities referred to herein may be obtained from ANZ S upon request. Any US person(s) receiving this document and wishing to effect transactions in any securities referred to herein should contact ANZ S, not its affiliates. This document is being distributed in the United Kingdom by ANZ for the information of its market counterparties and intermediate customers only. It is not intended for and must not be distributed to private customers. In the UK, ANZ is regulated by the FSA. Nothing here excludes or restricts any duty or liability to a customer which ANZ may have under the UK Financial Services and Markets Act 2000 or under the regulatory system as defined in the Rules of the FSA. This document is issued on the basis that it is only for the information of the particular person to whom it is provided. This document may not be reproduced, distributed or published by any recipient for any purpose. This document does not take into account your personal needs and financial circumstances. Under no circumstances is this document to be used or considered as an offer to sell, or a solicitation of an offer to buy. In addition, from time to time ANZ, ANZ NZ, ANZ S, their affiliated companies, or their respective associates and employees may have an interest in any financial products (as defined by the Australian Corporations Act 2001), securities or other investments, directly or indirectly the subject of this document (and may receive commissions or other remuneration in relation to the sale of such financial products, securities or other investments), or may perform services for, or solicit business from, any company the subject of this document. If you have been referred to ANZ, ANZ NZ, ANZ S or their affiliated companies by any person, that person may receive a benefit in respect of any transactions effected on your behalf, details of which will be available upon request. The information herein has been obtained from, and any opinions herein are based upon, sources believed reliable. The views expressed in this document accurately reflect the author s personal views, including those about any and all of the securities and issuers referred to herein. The author however makes no representation as to its accuracy or completeness and the information should not be relied upon as such. All opinions and estimates herein reflect the author s judgement on the date of this document and are subject to change without notice. No part of the author's compensation was, is or will directly or indirectly relate to specific recommendations or views expressed about any securities or issuers in this document. ANZ, ANZ NZ, ANZ S, their affiliated companies, their respective directors, officers, and employees disclaim any responsibility, and shall not be liable, for any loss, damage, claim, liability, proceedings, cost or expense ( Liability ) arising directly or indirectly (and whether in tort (including negligence), contract, equity or otherwise) out of or in connection with the contents of and/or any omissions from this communication except where a Liability is made non-excludable by legislation. Where the recipient of this publication conducts a business, the provisions of the Consumer Guarantees Act 1993 (NZ) shall not apply. Page 6
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