AUD/USD Exchange Rate Outlook - Richard Grace Chief Currency and Rates Strategist & Head of International Economics +(612) 9117 0080 ...
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AUD/USD Exchange Rate Outlook Richard Grace Chief Currency and Rates Strategist & Head of International Economics +(612) 9117 0080 richard.grace@cba.com.au March 2015
Outlook for AUD/USD Exchange Rate
AUD/USD is likely to further depreciate to 0.7300 by end-June and 0.7000 by end-2015 for 5 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.
1.00 0.8864 1.00
(3) Slower Chinese growth, lower Asian inflation, rates and
0.85 0.85
currencies, which are applying downward pressure.
0.70 0.70
(4) A stronger USD – in response to a higher US terms of
1983 - 2004 Average trade, and the prospect of higher US interest rates.
0.55 0.7040 0.55
AUD /USD (rhs)
0.40 0.40
(5) Cross-rate pressure - from a large USD bid in the global
Dec-83 Oct-94 Aug-05 Jun-16 foreign exchange market.
2Importance of Global Growth Revisions Should Not be Underestimated
IMF revisions to global growth should be taken note of.
3Commodity Prices Lower – Led by Increases in Supply
Excess commodity supply is driving commodity prices lower, rather than soft demand.
GLOBAL OIL BALANCE GLOBAL MINING INVESTMENT
%pa (source: Energy Intelligence Group) %pa
8 8 $US
350
(volumes, 1995 prices)
bn
280
Globla Oil Supply
4 4
Average 210
140
0 0
Global Oil Demand 70 Developed markets
Emerging markets
-4 -4 0
Jan-04 May-06 Sep-08 Jan-11 May-13 Sep-15 1995 1998 2001 2004 2007
4Commodity Prices Lower – Led by Increases in Supply
AUD being used as a proxy for lower commodity prices and because export prices falling.
AUD/USD & AUSTRALIA'S
OIL PRICE & RBA COMMODITY TERMS OF TRADE
PRICE INDEX 130 1.15
140 140
Australia
Brent Oil Price US$b Terms of Trade Index (lhs)
(lhs)
112 1.01
112 116
94 0.87
84 92
RBA Commodity Price
Index (SDR Terms) rhs 76 0.73
56 68
AUD /USD (rhs)
58 0.59
28 44
40 0.45
0 20
Mar-00 Jul-03 Nov-06 Mar-10 Jul-13 Nov-16
Jun-88 Jun-93 Jun-98 Jun-03 Jun-08 Jun-13
5Lower 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
AUSTRALIA GDP AND INCOME AUSTRALIA GDP GROWTH
GROWTH %
Annual % Change
%
5.0 8.0
Domestic Demand
8 8
2.5 6.0
GDP
4 4
0.0 4.0
Difference between
Real Gross Domestic
Income and Real GDP 0 0
-2.5 2.0
Growth YoY% (lhs)
RBA Cash Rate (rhs) Net Exports (contribution)
-5.0 0.0 -4 -4
Mar-02 Feb-05 Jan-08 Dec-10 Nov-13 Oct-16 Mar-00 Dec-03 Sep-07 Jun-11 Mar-15
6Australian Unemployment Rate & RBA Cash Rate
Australia unemployment rate generally rises when employment growth is less than 2.0%
AUSTRALIA LABOUR MARKET AUSTRALIAN EMPLOYMENT
& RBA CASH RATE 6
8.4 3.7 Total Employment Growth
(YoY%) lhs
5 If employment growth falls 6.6
Unemployment Rate below 2.0% (YoY), the
7.0 (Inverted Three Month 4.3 unemployment rate
Moving Average) rhs 4 generally rises 6.2
5.6 4.8 3 5.7
2 5.3
4.3 5.4
1 4.9
2.9 5.9
0 4.4
RBA Cash Rate (lhs)
Unemployment
1.5 6.5 Rate (rhs)
-1 4.0
Mar-04 Jun-06 Sep-08 Dec-10 Mar-13 Jun-15
Jan-03 Dec-05 Nov-08 Oct-11 Sep-14
7Australian vs. US Unemployment Rate
Australia-US unemployment rate divergence and differential is a powerful guide for AUD.
AUSTRALIA & US AUD/USD & AUSTRALIA-US
UNEMPLOYMENT RATES
UNEMPLOYMENT RATE DIFFERENTIAL
US Unemployment -5.0 1.14
AUD/USD (rhs)
11.0 Rate 11.0
Australia-US
-3.0 Unemployment Rate 0.99
(lhs)
9.0 9.0
-1.0 0.84
7.0 7.0
1.0 0.70
5.0 5.0 3.0 0.55
Australian Unemployment Rate
3.0 3.0 5.0 0.40
Feb-78 Feb-88 Feb-98 Feb-08 Feb-18 Feb-78 Feb-88 Feb-98 Feb-08 Feb-18
8Australia’s Domestic Economy Weak and Australia-US Rates Narrowing
US economy firming. Australia-US two-year bond spread currently at 123bpts
MARKET PRICING FOR RBA
% (30-day Interbank Futures ) Bpts
3.00 0.15
AUD/USD & AUSTRALIA-US 2.75 0.10
% TWO-YEAR BOND SPREAD
2.50 Bpts Per Meeting (rhs) 0.05
6.0 1.15
Australia-US Two-Year Bond
2.25 0.00
Spread (lhs)
4.5 1.03
Cumulative (lhs)
2.00 -0.05
3.0 0.90 1.75 -0.10
Pricing RBA Rate Cuts
1.50 -0.15
1.5 0.78
MAR 15 JUN 15 SEP 15 DEC 15 MAR 16 JUN 16
MARKET PRICING FOR FED FUNDS
% (30-day Fed Fund Futures)
0.0 0.65 2.50
150 Bpts
2.25
Pivot Level
-1.5 0.53 2.00
Market Pricing for
AUD/USD (rhs) 1.75 Fed Rate Hikes
1.50
-3.0 0.40
Mar-92 Jan-97 Nov-01 Sep-06 Jul-11 May-16 1.25
Current Fed Funds Rate
1.00
0.75
0.50
December 2015
0.25
9 0.00
Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17Forecasts – Exchange Rates
Date AUD
Period (input)
Current 0.7728
AUD/USD & TERMS OF TRADE Mar-15 0.7600
Jun-15 0.7300
136 2.00
Sep-15 0.7200
Australia Dec-15 0.7000
Terms of Trade Mar-16 0.7100
117 Index (lhs) 1.68 Jun-16 0.7200
AUD /USD (rhs)
Sep-16 0.7300
Dec-16 0.7400
98 1.36 Mar-17 0.7500
Jun-17 0.7600
Float
Sep-17 0.7800
Dec-17 0.8000
78 1.04
Mar-18 0.8200
Jun-18 0.8500
Sep-18 0.8800
59 0.72 Dec-18 0.8800
Mar-19 0.8800
Jun-19 0.8800
40 0.40 Sep-19 0.8800
Sep-59 May-71 Jan-83 Sep-94 May-06 Jan-18 Dec-19 0.8800
Mar-20 0.8800
Jun-20 0.8800
Sep-20 0.8800
Dec-20 0.8800
10Some Long-Run Considerations on Commodity Prices
REAL COMMODITY PRICES OVER THE LAST 214 YEARS
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