How will the Aussie dollar perform in the near-term?
We see the Australian dollar trending downwards over the next 12-months.
The 10% or so rise in the Australian dollar over the past few months is due to the negative outlook at the beginning of the year giving way to improving confidence in the global economy – rising prices for iron ore and oil for instance.
This pushes up the value of our dollar as well as global share markets. In the short term, we could see the Australian dollar rise to 80 cents. However, this isn’t likely to be sustained through the medium term.
Over the next 12-months, we expect to see the Australian dollar trending downwards as commodity prices remain in a long term bear market. By mid-2017, it is likely to fall below 70 cents and into the 60s.
RBA on hold as rising Aussie dollar presents complications
As widely expected the Reserve Bank of Australia (RBA) left interest rates on hold at its April meeting. This marks the eleventh month in a row with the cash rate remaining at 2.0%.
In its statement accompanying the decision, the RBA again made very little changes and retained an easing bias. However, it did acknowledge the recent improvement in commodity prices and financial markets and dropped the reference to assessing the impact of financial turbulence on the economic outlook.
Significantly though, the RBA singled out the rise in the value of the Australian dollar, which is up 6% since the last meeting, devoting a whole paragraph to the currency as opposed to a single sentence in last month’s Statement. In noting that an appreciating Australian dollar could “complicate the adjustment underway in the economy”, the RBA has effectively reintroduced a subtle form of jawboning designed to try and push it back down again. The clear implication is that a further gain in the value of the Australian dollar could cause the RBA to act on its bias to cut interest rates again.
What’s our outlook?
Our view remains that the RBA will indeed cut interest rates again in the months ahead for four reasons:
- First, growth is likely to slow back to around 2-2.5% as the contribution from housing fades reflecting falling building approvals and fading wealth effects at a time when mining investment is still contracting.
- Second, unemployment is likely to remain relatively high at around 6% with jobs growth slowing.
- Third, inflation is likely to remain at or below the bottom of the RBA’s 2-3% inflation target.
- And finally, the recent rebound in the value of the Australian dollar is a threat to trade exposed sectors like tourism, higher education and manufacturing helping to fill the growth gap left by a slowing housing sector. Soft jobs data next week, soft March quarter inflation data later this month and continued strength in the Australian dollar could set the scene for a May rate cut, which is our base case or failing that it could be delayed into the September quarter.
Bottom line: Whether there is another rate cut or not from the RBA, it remains very hard to see rate hikes any time soon. So the period of low interest rates is set to continue.
About the author
Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.