It is a new year, but not a fresh outlook for interest rates and the Australian dollar.
Despite the turmoil that rocked global markets over the last few months of 2018, the Aussie dollar was remarkably resilient late last year, mainly holding in the low 70 US cent range over the second half of the year.
A very short-lived plunge of a few cents to a decade low of 67.3 US cents last week offered a hint that 2019 might not be all as smooth sailing for the local currency. But trading volumes are light while most investors are on holiday, making markets more prone to volatility, and the drop was quickly reversed … for now.
An Australian dollar in the low 70s is more than 10 per cent down from highs above 80 US cents early last year, but those falls had more to do with US dollar strength, as the Federal Reserve raised interest rates, than it did with the Aussie dollar declining.
This is reflected in the trade weighted index, which looks at the Aussie in relation to a basket of other currencies from countries we trade with.
The TWI only declined from about 94 at the start of the year to 91 around the end.
A large factor in this relative stability has been the consistency of monetary policy, with the Reserve Bank’s official cash rate target sitting at a record low of 1.5 per cent and little sign of it moving in the short term.
But can the AUD maintain its steady run in 2019? And will the Reserve Bank be able to fulfil its medium-term goal of raising interest rates back up from record lows, or might it even have to cut them again?
ABC News consulted half a dozen analysts to find out where they expect the dollar and interest rates to be at the end of this year, and why.
Paul Brennan, head of Australia economic research, Citi:
Citi’s Paul Brennan described the bank’s forecasts for the end of 2019 as “not particularly exciting, with both the cash rate (1.5 per cent) and the Aussie dollar (72 US cents) expected to be largely unchanged from where they ended 2018.
On rates, Mr Brennan still expected the next move to be a rate rise, but said much depended on whether the Sydney and Melbourne housing slump would escalate.
“Assuming house prices stabilise late next year and the Fed leaves rates around neutral through 2020 rather than cutting, the next move by the RBA is likely to be up, but not until the second half of 2020.”
Likewise, Mr Brennan’s currency analyst colleagues at Citi believe the Aussie dollar is sitting around fair value against the greenback and is unlikely to move much in the short term.
“The AUD could appreciate moderately against a forecast weaker USD, but probably not until 2020.”
Chris Weston, head of research, Pepperstone:
With no action expected from the Reserve Bank, Chris Weston agrees with Mr Brennan that the Australian dollar is likely to end the year at a similar level to where it traded over the second half of 2018, around 73 US cents.
However, with the RBA immobile, the exchange rate with the US dollar will be largely dependent on what the Federal Reserve does.
“We feel the risk is for one more hike from the Fed, although it would not surprise if the Fed’s hiking cycle is now over and we may even start to have a more robust conversation about an early end to the Fed’s unwind of its balance sheet.
“This would be a game changer, especially for emerging market (EM) assets, where the investment community could look quite favourably in 2019 … upside in EM assets should support the AUD.”
That’s the positive scenario for the currency. But Mr Weston also sees downside risks, again mainly related to the housing market.
“Should we see signs that weaker asset prices are genuinely affecting consumer and business confidence, then we will be putting more emphasis on this notion that the RBA could be open to more unconventional monetary policy settings — that would greatly affect my call and suggest we could be looking for a 65 cent to 63 cent range.”
David de Garis, senior economist, NAB:
Mr de Garis expects the Australian dollar to be a touch higher at the end of the year than at the start, at 75 US cents, but warns the currency is likely to weaken before it strengthens, possibly below 70 cents for a while.
NAB is part of the near consensus that interest rates will remain on hold at 1.5 per cent and, while he believes a cut is unlikely, Mr de Garis did not rule out the possibility.
“We’re expecting economic growth to be lower in 2019 than 2018.
“A cut would require quite a big change in the economic outlook. You’d need to see housing turn into a macroeconomic event with significant job losses, and we’re just not seeing that at the moment.”
Richard Grace, chief currency strategist, Commonwealth Bank:
CBA has the same currency forecast as NAB, with Richard Grace expecting a 75 US cent exchange rate at year’s end, and a very similar interest rate outlook.
“AUD/USD is likely to remain in a tight range because of: (i) USD strength; (ii) concerns global economic growth may slow more rapidly; (iii) the RBA will not start a rate tightening cycle until November 2019 or later; and (iv) modestly declining commodity prices as Chinese economic growth slows.”
Mr Grace does not foresee the prospect of large falls for the Australian dollar, because of the nation’s strong economic growth and a limited downside for commodity prices.
David Plank, head of Australian economics, ANZ:
ANZ’s economics team also sees a fairly steady outlook for Australia’s economy, but David Plank said the risk of things going wrong had risen and that would delay any thoughts of a rate rise by the RBA.
“A substantial pipeline of activity in public spending, business investment and exports should support above-trend growth of close to 3 [per cent].
“In turn this should see a further decline in the unemployment rate and somewhat higher wage growth and inflation.
“But the downside risks around the outlook have risen, particularly on the domestic front, with ongoing low wages growth and falling house prices putting a cloud over the outlook for consumer spending.
“Given this risk we think it unlikely that the RBA will increase the cash rate while house prices are falling.”
Damien McColough and Imre Speizer, Westpac:
While not predicting a rate cut, Westpac has one of the gloomier outlooks for Australia’s economy, and consequently for interest rates and the Australian dollar.
“The latest GDP print has seen markets speculate on the potential for a further domestic slowdown and remove all pricing for a policy move in 2019.
“Current pricing is even flirting with a small probability of a cut. That won’t happen but market pricing will likely range between a 10 per cent chance of a rate cut and 50 per cent of a hike.
“With at best trend growth and still quiescent inflation, we maintain our long-held view that the RBA will remain on hold through 2019 and in 2020.”
The bank also does not see any real upside for the Australian dollar.
“Atmospherics for AUD remain poor — domestic slowdown; US-China trade tensions; dwindling yield spreads; recent global equity volatility and political uncertainty with the Australian Government now in a minority position and an election due.”
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