Australian dollar in 2018-19: Experts clash on whether it will crash or surge

Posted January 05, 2018 05:59:13

Photo: Currency experts from nine banks offered different views on how the Australian dollar will perform. (AAP: Joel Carrett)

Depending on which expert you ask, the Australian dollar might sink to 65 US cents or surge to 88 US cents by the end of next year.

When surveying currency experts from nine different banks, the ABC heard nine wildly different forecasts on where the local currency is headed.

It was almost like playing a blind game of darts — except this one affects which investments to make, or when to go on that overseas holiday.

Whether the Aussie dollar gets stronger or weaker depends on factors like the speed of US economic recovery, whether commodity prices get higher, and by how much China's economy slows down.

But there was even substantial disagreement among the banks on all of those factors.

Why might the dollar surge?

Commonwealth Bank, UBS and HSBC were the banks had the most optimistic forecasts.

The Australian dollar will strengthen because of a depreciating US greenback, CBA's senior currency strategist Elias Haddad said.

Although US President Donald Trump finally managed to pass his corporate tax cuts through Congress, "the fundamental downtrend in the US dollar is intact", Mr Haddad said.

There is no doubt that the Federal Reserve will raise America's interest rates this year. But the question is how many times will it happen?

Even within the Fed's own committee, there's significant disagreement on whether it should be two rate hikes, or at least four.

Higher US interest rates, in theory, makes America a more attractive place to invest — luring money away from Australia (and other countries), and resulting in less demand for the local currency.

But there are also other countries with "improving economies and moderately rising inflation" which will announce rate hikes in the near future.

Mr Haddad said this "will have a greater appreciating impact on their exchange rates, than will the Fed lifting interest rates over 2017-18 on the US dollar".

The bulls' AUD/USD forecasts

CBA also expects commodity prices will "remain supported" due to the global economy experiencing its "first synchronised upswing for a number of years".

As for UBS's position, its global macro strategist Joakim Tiberg believes the Australian dollar will benefit from "a lot of global growth and decent demand for commodities", especially at lower prices.

Even though iron ore prices have rebounded in recent months (and are sitting above $US74 per tonne), they are still a far-cry from its hey-day.

Back in early 2011, Australia's key commodity was worth more than $US180 a tonne.

"But if you look at volume of exports, they have more than doubled since 2011, when the commodities boom was still happening," Mr Tiberg said.

In any event, all three of the 'bullish' banks expect the Reserve Bank to raise interest rates in the second half of this year.

Reasons why the dollar might fall

On the other end of the spectrum, Morgan Stanley had the most pessimistic view, and expects the Australian dollar "to depreciate sharply over 2018".

Why the RBA can't move

Some economists see the Reserve Bank hiking interest rates before the end of the year. Ian Verrender reckons they're dreaming.

The New York-based investment bank is betting the RBA will keep local interest rates on hold at the record low 1.5 per cent until the second half of 2019 — while the Federal Reserve will lift US interest rates three times this year.

As for most of the other banks, they expect the next domestic rate hike will happen, at least, by the end of this year — but with no consensus on the number of US rate increases ahead.

"A heavy toll will be taken on the Australian dollar" given that US rates will likely become higher than Australia's within months, according to Westpac's chief economist Bill Evans.

The last time this occurred was about two decade ago, when the Australian dollar plunged as low as 48 US cents.

The bears' AUD/USD forecasts

Morgan Stanley also didn't agree with CBA's upbeat commodities outlook.

"Our commodity team is forecasting flat commodity prices into 2018, largely driven by weaker demand," Morgan Stanley equity strategist Chris Nicol said.

"Importantly for Australia, however, iron ore and coking coal prices are expected to decline as China's environmental policies reduce the demand for steel."

But another factor to consider is the possibility of an economic slowdown in China.

Central bank bubble trouble

Central banks pumped asset bubbles to revive the global economy, now they are desperately trying to deflate them.

"We expect China's growth rate will reach a comfortable 6.8 per cent in 2017, but anticipate a decent slowdown in 2018 to 6.2 per cent," Westpac's Mr Evans said.

One of the more downbeat perspectives came from JPMorgan's chief economist Sally Auld, who expects the RBA to even cut interest rates in 2019.

"The Trump tax cuts are not a big deal for the US dollar — it may go sideways, and we are not overly bullish about it," Ms Auld said.

"We also don't have high hopes for iron ore, and we see it trading in the low 60s [US dollars per tonne] for the next while."

JP Morgan's view was that the RBA's next move might actually be a rate cut, rather than rate hike like many other economists are expecting.

"Until we see higher wages, the Reserve Bank can't be confident about getting inflation back to target, so this whole story of rate hikes feels a long way off," Ms Auld said.

JP Morgan declined to provide currency forecasts for 2019 on the basis it is a long time into the future, and anything could happen between now and then.

The silver lining

The upside to a weaker local currency it might lead to stronger foreign demand for Australian exports.

"The depreciation is also expected to lead to a pickup in inflation in 2019 as import prices increase," Mr Nicol said.

He also forecast inflation could be pushed "to the top of the RBA's target band of 2.9 per cent, year-over-year, in the final quarter of 2019".

"This added inflationary impulse, improving labour market and more benign housing market should see the RBA begin a tentative tightening cycle as it looks ahead to conditions in 2020."

But Mr Evans is doubtful on how much demand may come from the nation's major trading partner China.

"If we are speculating on the most significant 'unknown' for 2018 and 2019, the Chinese financial system, particularly for Australia, stands above any other issues that should be worrying us," he said.

Topics: business-economics-and-finance, currency, economic-trends, australia