AUD/USD Exchange Rate Outlook
Richard Grace
Chief Currency and Rates Strategist & Head of International Economics
+(612) 9117 0080
richard.grace@cba.com.au
February 2015
Outlook for AUD/USD Exchange Rate
AUD/USD is likely to further depreciate to 0.7300 by end-June 2015 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
downward pressure on Australian swap rates. At the
AUD/USD EXCHANGE RATE
same time, an improving US economy and guidance
1.15
1.15
from the FOMC is generating mild upward pressure
Recent Ten-Year Average
on US short-term swap rates.
0.8864
1.00
1.00
0.85
0.85
0.70
0.70
0.55
1983 - 2004 Average
0.7040
(3) Slower Chinese growth, lower Asian inflation, rates and
currencies, which are applying downward pressure.
(4) A stronger USD – in response to a higher US terms of
trade, and the prospect of higher US interest rates.
0.55
AUD /USD (rhs)
0.40
Dec-83
Oct-94
Aug-05
0.40
Jun-16
(5) Cross-rate pressure - from a large USD bid in the global
foreign exchange market.
2
Importance of Global Growth Revisions Should Not be Underestimated
IMF revisions to global growth should be taken note of.
3
Commodity Prices Lower – Led by Increases in Supply
AUD being used as a proxy for lower commodity prices and because export prices falling.
AUD/USD & RBA COMMODITY
Index
AUD
PRICE INDEX
GLOBAL OIL BALANCE
(annual % change)
8
%pa
1.25
140
Demand
1.09
4
Supply
0.93
AUD/USD (lhs)
RBA Commodity Price
Index (SDR Terms) rhs
112
84
0.77
56
0.61
28
0
Average
-4
Jan-04
May-06
Sep-08
Jan-11
May-13
0.45
0
Jan-86 Jan-91 Jan-96 Jan-01 Jan-06 Jan-11 Jan-16
Sep-15
4
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
AUD/USD & AUSTRALIA'S
TERMS OF TRADE
1.15
130
AUSTRALIA GDP AND INCOME
GROWTH
5.0
8.0
2.5
6.0
0.0
4.0
Australia
Terms of Trade Index (lhs)
112
1.01
94
0.87
0.73
76
AUD /USD (rhs)
-2.5
0.59
58
Difference between
Real Gross Domestic
Income and Real GDP
Growth YoY% (lhs)
2.0
RBA Cash Rate (rhs)
40
Mar-00
Jul-03
Nov-06
Mar-10
Jul-13
0.45
Nov-16
-5.0
Mar-02
5
Feb-05
Jan-08
Dec-10
Nov-13
0.0
Oct-16
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
AUD/USD & AUSTRALIA-US
TWO-YEAR BOND SPREAD
%
1.15
6.0
8
Domestic Demand
Australia-US Two-Year Bond
Spread (lhs)
8
GDP
4
0
4.5
1.03
3.0
0.90
1.5
0.78
0.0
0.65
4
150 Bpts
Pivot Level
0
0.53
-1.5
AUD/USD (rhs)
Net Exports (contribution)
-4
Mar-00
-3.0
Mar-92
-4
Dec-03
Sep-07
Jun-11
Mar-15
6
Jan-97
Nov-01
Sep-06
Jul-11
0.40
May-16
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)
1.25
ASIAN CURRENCIES AND
ASIA INFLATION
Pts
125
125
8
ADXY - Non-Japan Asia
Currency Basket vis-a-vis
USD (lhs)
1.10
120
AUD/USD (lhs)
0.95
6
111
4
103
2
115
0.80
110
ADXY - Weighted
Non-Japan Asia
Currency Basket
against USD (rhs)
0.65
0.50
Jan-06
118
105
Asian Inflation (rhs)
GDP-Weighted 11 Country Index
100
Jan-08
Jan-10
Jan-12
Jan-14
96
Mar-05 Mar-07 Mar-09 Mar-11 Mar-13 Mar-15
7
0
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
100
China’s Interest Rate Cut and Growth Challenges
China interest rate cut due to lower inflation and a slowing economy.
%
10.0
CHINA SELECTED INTEREST
RATES
USD/CNY DAILY Mid-FIX and USD/CNH
(Historical Spread)
%
6.30
29
Benchmark One-Year
Lending Rate (lhs)
Reserve Requirement
Ratio (RRR) (rhs)
8.0
6.25
23
6.0
0.1500
Positive CNH-CNY
Mid-Fix Spread
Reflecting
Expectations of a
Weaker RMB (rhs)
USD/CNH (lhs)
0.1067
6.20
0.0634
6.15
0.0201
17
Two-Year Bond Yield (lhs)
4.0
12
6.10
2.0
USD/CNH
Daily Mid-Fix (lhs)
6
6.05
Benchmark One-Year
Deposit Rate (lhs)
0.0
Apr-07 Sep-08 Feb-10
Jul-11
0
Dec-12 May-14 Oct-15
6.00
Jun-13
8
Negative
CNH-CNY
Mid-Fix
Spread
Reflecting
Expectations
of a Stronger
RMB (rhs)
-0.0232
-0.0665
-0.1098
Nov-13
Apr-14
Sep-14
Feb-15
Jul-15
China Capital Outflows Alarming; But Global Demand for A$Bonds Firm
China capital outflows worth watching. Otherwise global demand for A$ bonds is healthy.
FINANCING AUSTRALIA'S CURRENT
ACCOUNT DEFICIT
CHINA'S BALANCE OF PAYMENTS
(% GDP, 4Q SUM)
15
15
10
Financial +
Capital
Account
Current Account
10
A$bn
150
Current Account
Deficit (inverted)
113
Equities
(rolling 4Qtr sum)
A$bn
150
Government (Foreigners
Buying A$ Bonds)
113
5
5
75
75
0
0
38
38
-5
-5
0
0
-38
-10
-10
Other Flows
Reserves
-15
Dec-99
-38
Banks
08
09
10
11
12
13
15
Note: Bank flows include derivative, excludes reserve asset flows
-15
Aug-02
Dot Com Bust
US Recession
Apr-05
Dec-07
Aug-10
Global Financial
Crisis
Other Sectors
-75
Apr-13
China Slowing etc.
Eurozone Crisis
9
-75
How Much Further Should AUD Depreciate ?
Australia’s real exchange rate too high because Australia’s decline in inflation is lagging
AUSTRALIA TWI
Index
230
Index
120
NOMINAL & REAL
190
SELECTED INFLATION RATES
BASE 100 = Q3 2011 (PEAK in AUD)
100
100
80
80
60
60
100
Real TWI (lhs)
150
80
Australia
40
110
40
US
60
Asia
20
Nominal TWI (rhs)
70
Jun-70
Eurozone
40
Aug-79
Oct-88
Dec-97
Feb-07
20
0
Sep-11
Apr-16
Dec-12
Mar-14
Jun-15
Sep-16
0
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 2015
10
Partial Disconnect between AUD/USD and TWI
Reflects impact of USD strength and very low interest rates in other economies
JAPAN, UK, EUROZONE & US
TWO-YEAR BOND YIELDS
AUD/USD &
AUSTRALIA TRADE-WEIGHTED INDEX
1.00
1.00
0.97
74.0
Australia TradeWeighted Index
(lhs)
71.2
0.75
0.75
0.93
68.4
0.88
65.6
0.84
62.8
0.79
US Two-Year Bond Yield
0.50
UK TwoYear Bond
Yield
0.25
Feb-14
May-14
Aug-14
Nov-14
Feb-15
0.75
May-15
-0.25
Aug-11
Eurozone
Two-Year Bond Yield
Nov-12
Feb-14
-0.25
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
0.25
0.00
0.00
AUD/USD (rhs)
60.0
Nov-13
0.50
Japan Two-Year
Bond Yield
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.
LONG RUN USD CYCLES
USD
& REAL TWO-YEAR SWAP SPREAD
US REAL BROAD TWI
Index
(Peak=100)
Index
110
110
Source: JP Morgan/FRB
4.0
98
US-Major Currency Real Two-Year
SwapSpread (lagged 4 Months) lhs
3.0
100
100
Feb-02
to
Current
Jan-70 to Mar 85
USD TWI
(Major Currency) rhs
2.0
90
90
94
90
1.0
86
0.0
82
-1.0
79
-2.0
75
80
80
70
Mar-85 to
Feb 99
70
-3.0
Jan-06
Signifies end of depreciation cycle
60
60
-6
11
28
45
62
79
96
113
130
147
164
Months from peak
12
71
Jul-07
Jan-09
Jul-10
Jan-12
Jul-13
Jan-15
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 TRADE BALANCE
US TERMS OF TRADE & USD
(Annual US$b)
110
160
USD Major Currency TWI (rhs)
USD
200
bn
USD
200
bn
Trade Deficit
(ex.energy)
106
134
0
103
108
-200
-200
99
82
-400
-400
96
56
-600
30
Dec-87
Dec-94
Dec-01
Dec-08
-600
Energy Trade
Deficit
(ex. gas)
USD Terms of Trade (lhs)
92
Dec-80
0
Gas Trade Balance
-800
Jan-00 Jan-03 Jan-06 Jan-09 Jan-12 Jan-15
Dec-15
13
-800
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 2015 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
Some Long-Run Considerations on Commodity Prices
REAL COMMODITY PRICES OVER THE LAST 214 YEARS
15
Forecasts – Exchange Rates
End-Pe riod Fore cas ts
Curre nt
11-Feb -15
M ar-15
Jun-15
Se p-15
De c-15
End-Pe riod Fore cas ts
Curre nt
11-Feb -15
M ar-16
M ar-15
Jun-15
Se p-15
De c-15
M ar-16
Se le cte d Cros s Rate s
M ajors
A UD
0.7778
0.7800
0.7300
0.7600
0.7700
0.7800
EUR-JPY
135.33
131.08
134.20
136.53
141.36
147.20
EUR
1.1327
1.1300
1.1000
1.1100
1.1400
1.1500
EUR-GBP
0.7422
0.7584
0.7586
0.7500
0.7600
0.7616
JPY
119.48
116.00
122.00
123.00
124.00
128.00
EUR-CHF
1.0491
1.0150
0.9900
1.0100
1.0400
1.0500
GBP
1.5262
1.4900
1.4500
1.4800
1.5000
1.5100
Se le cte d Global-Quote d Cros s Rate s
CA D
1.2578
1.2700
1.3400
1.2900
1.2800
1.2500
EUR/A UD
1.4563
1.4487
1.5068
1.4605
1.4805
1.4744
NZD
0.7300
0.6700
0.6800
0.6800
0.6900
GBP/A UD
1.9622
1.9103
1.9863
1.9474
1.9481
1.9359
0.7433
EUR/NZD
1.5239
1.5479
1.6418
1.6324
1.6765
1.6667
CHF
0.9262
0.8982
0.9000
0.9099
0.9123
0.9130
GBP/NZD
2.0533
2.0411
2.1642
2.1765
2.2059
2.1884
A UD-NZD
1.0464
1.0685
1.0896
1.1176
1.1324
1.1304
A UD-EUR
0.6867
0.6903
0.6636
0.6847
0.6754
A UD-JPY
92.93
90.48
89.06
93.48
A UD-GBP
0.5096
0.5235
0.5034
A UD-CA D
0.9783
0.9906
A UD-CHF
0.7204
A UD-CNY
A UD-SGD
AUD Cros s Rate s
A ustralia TWI
Non-Japan As ia Countrie s
USD-CNY
6.2428
6.2300
6.2500
6.2000
6.1500
6.1000
0.6783
USD-SGD
1.3554
1.3200
1.3300
1.3100
1.3100
1.3100
95.48
99.84
USD-HKD
7.7537
7.7500
7.7500
7.7500
7.7500
7.7500
0.5135
0.5133
0.5166
USD-THB
32.64
32.00
33.00
32.50
32.00
32.00
0.9782
0.9804
0.9856
0.9750
USD-IDR
12,705
13,000
13,000
12,500
12,500
12,000
0.7006
0.6570
0.6915
0.7025
0.7122
USD-TWD
31.48
31.50
32.00
32.00
31.00
31.00
4.8594
4.5625
4.7120
4.7355
4.7580
USD-KRW
1,097
1,125
1,150
1,100
1,100
1,100
4.8556
USD-MY R
3.5880
3.4500
3.5000
3.4000
3.3500
3.3500
1.0542
0.9828
0.9636
1.0032
1.0241
1.0218
USD-V ND
21,335
22,000
22,000
22,000
22,000
22,000
64.2
65.29
62.09
63.96
64.37
65.18
USD-PHP
44.361
45.00
46.00
45.00
44.50
44.00
USD-INR
62.195
64.00
64.50
63.50
62.50
61.50
16
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