The Fed is playing around and the Australian dollar is falling. How long will the Australian dollar fall and rise? Long-term prospects for the Australian currency
The Australian dollar risks falling to 70 US cents this year as China's economy slows and the Federal backup system continues to increase interest rates in the US, according to BlackRock Inc.
The Aussie fell below 74 cents on Tuesday for the first time in a year as the trade dispute between the US and China, Australia's largest trading partner, escalates. The currency is facing more pressure as policy divergence sees Australian bond yields lower than US Treasuries.
“The conditions have been created for Aussie to continue to decline. The rate differential is certainly there and the potential for a China slowdown,” Craig Vardy, head of fixed income, said in an interview this week in Sydney. A slowdown in local lending growth could also increase stress on the economy and currency, he said.
BlackRock joins the growing ranks of asset managers selling the Aussie as growth in China cools. More pressure comes from the Fed, which has raised interest rates seven times since December 2015, while Reserve Bank Australia is expected to keep its rate at a record low until at least the middle of next year.
Short positions
The Aussie could extend its decline to 65 over the next 12 months, Pendal Group said last week, while Westpac Banking Group said the currency pair could fall to 70 cents in 2019.
BlackRock cut its six-month forecast for the Aussie to 78 cents to 73 cents, from an earlier forecast of 80 to 75 cents, Vardy said. “73 probably sees that in the short term, but over the longer term there is potential for it to move below that,” he said. The currency fell to 73.47 cents on Tuesday, its lowest in a year. It was trading at 74.07 as of 3:33pm in Sydney on Wednesday.
Australian 10-year bond yields fell five basis points on Tuesday to close at 2.62 percent, compared with 2.90 percent for US peers.
Stormy American economy means the US dollar is poised to extend recent gains, potentially rising another 5 percent, Vardy said. According to him, further tightening by the Fed should see basic indicators Treasury yields to 3.25 percent by year end. Vardy sees two more rate hikes in the US this year and two in 2019.
“Against the backdrop of tightening by the Federal Reserve on the one hand and the Bank of Japan, the European central bank and other key central bankers who don't want to do anything," he said. “It absolutely points to a stronger dollar.”
This analytical article was written after the closure of the American market.
Consolidation dominated the markets on Thursday following strong movements in currency pairs the day before. The only serious movement was demonstrated only by Australian dollar, which decreased against the backdrop of the RBA’s connivance towards the issue of raising rates and deciding rating agency Standard & Poor's about the reduction credit rating China from A+ to AA-. Unlike the Fed, ECB, Bank of England and Bank of Canada, the Australian regulator is in no hurry to raise interest rates. Governor Lowe said the Australian economy appears to be strengthening and is on track for further improvement in the areas of employment and inflation, but rate increases will not have an immediate impact on the economy as the flexible AUD ensures there is no specific timing of rate increases. While he acknowledges that rates are more likely to rise, which investors should be prepared for, the market is clearly interpreting Lowe's comments to mean that the RBA will lag behind the Fed, ECB, Bank of England and Bank of Canada on policy tightening. For this reason the couple AUD/USD fell more than 1.3%, its biggest intraday decline in 4 months. We expect the AUD to continue to decline and could move as low as 0.78. We like the idea of selling AUD against EUR and CAD.
The New Zealand dollar also weakened against the US dollar, but its losses were minor compared toAUD.
The currency's weakness was somewhat surprising given that GDP grew 0.8% in the second quarter. The first quarter figure was also revised from 0.5% to 0.6%, which increased the annualized growth rate to 2.5%. In light of this report, the only logical explanation for the currency's weakness is fears that the RBA's reluctance to raise rates is prompting the RNBZ to also abandon tightening. The RNBZ, whose meeting is scheduled for next week, has previously expressed concern about the strong currency and stated its neutral position on the issue of rate hikes. The Canadian dollar recovered its positions and ended trading in positive territory against the US dollar. This reflected an intraday rebound in oil prices. Investors are also optimistic about the publication of statistics on consumer inflation And retail sales, especially after sharp growth wholesale sales indicator. The market expected wholesale sales to fall 0.7%, but instead they jumped 1.5%. The Bank of Canada is expected to continue raising interest rates this year, and today's data could largely confirm (or cast doubt on) that.
Despite the fact that the US dollar ended the day without any movement against the basket of currencies, the lack of continuation of Wednesday's rally is a sign that USDloses momentum. Although jobless claims were significantly lower than expected, the Philadelphia Fed index beat forecasts and key indicators improved, the US dollar did not strengthen against this background. The unemployment report was skewed by employees returning to work after the hurricanes, but the pick-up in Philadelphia manufacturing activity is clearly positive. With all the economic reports confirming the Fed's hawkish stance, we believe the dollar's pullback will be short-lived, especially in USD/JPY And USD/CHF. Meanwhile, as expected, the Bank of Japan kept interest rates unchanged, but what was surprising was that 1 out of 2 new members of the Committee voted in favor of increasing stimulus measures, as they believe that the current level is insufficient to accelerate inflation to the target 2%.
The euro and pound showed positive dynamics. ECB chief Draghi spoke yesterday morning and is expected to speak again today. Despite the fact that he did not address the issue of the regulator's policy, investors are waiting for confirmation from the head of the ECB that the decision to reduce QE volumes will be made next month. Eurozone indicators continue to show growth, and consumer confidence fell less in September than in August. Today the September indicators of business activity in the eurozone will be released. Slightly softer numbers are expected, but gains in the ZEW Economic Sentiment Index and investor confidence suggest today's reports could be positive. If so, then the couple EUR/USD may once again strengthen to the level of 1.20. The pound rose above 1.35, partly thanks to lower net borrowings public sector. Investors are also optimistic that Prime Minister May will be committed to a soft Brexit and provide an update on the progress of negotiations at a speech in Florence today. Most reports say May will offer to pay 20 billion euros (the EU insists on 60 billion) if the UK is allowed into the EU market. The EU is not expected to provide an immediate response, so the market will focus solely on Theresa May's proposals.
Key events today:
1. Eurozone business activity indicators and speech by ECB head Draghi.
2. Speech by British Prime Minister Theresa May on the issue of Brexit.
3. Statistics on retail sales and consumer inflation in Canada.
Kathy Lien, Executive Director currency strategy divisions BKAssetManagement
It will break out of the captivity of sales and change its trajectory against the backdrop of the emergence of long-awaited inflationary pressure in largest economy world, according to State Street Global Advisors. Changing the trend of the so-called “ big dollar"Coupled with deteriorating trading conditions in Australia, the "overvalued" Australian currency will decline by about 3.5% over the next six months, believes Colleen Crownover of State Street Global Advisors. Having broken above 0.8100 three weeks ago, the Aussie has pulled back about three cents and tested lows below 0.78 yesterday. The expert predicts the currency will weaken by another four cents.
Economic growth fuels interest in dollar
Wheedon senior global strategist Michael Purves wonders how far the US dollar's rise can go. At the end of last year, many forecasters predicted strong growth for the dollar in 2017. Instead, the Bloomberg dollar index fell 8.2% over the past 9 months. Analysts blame unexpected growth in European economy pushing growth single currency to the detriment of the dollar, and also refer to Trump's failure to fulfill promises made during the election campaign. But in last weeks The dollar has begun to recover, and now currency strategists are once again recalling their case for a sustained recovery that will continue into next year. “I think we'll see a strong rally in the dollar over the next couple of quarters,” Crownover said.
The strengthening of the “American” will come at the expense of Aussie. Moreover, its weakening is expected despite a potential RBA rate increase early next year.“I do believe that economic data in Australia is becoming so favorable that the RBA can afford to raise rates in the first quarter of 2018. This scenario could limit the decline national currency, but we think that the regulator will not tighten policy at the same pace as its colleagues in the form of the Federal Reserve and the Bank of Canada,” Crownover explained. The expert emphasizes that unless an economic catastrophe occurs in the United States, the Fed will raise rates in December. In addition, traders include in the price only one increase in the cost of lending next year, and Crownover does not agree with this market position. “The market greatly underestimates the potential pace of policy tightening in the United States,” the expert is confident.
In his opinion, the long-awaited price pressure will begin to manifest itself before the end of this year, which will strengthen the Federal Reserve's position regarding three rate hikes in 2018. Crownover points to an analysis of online prices, which he believes is more current and accurate than official figures showing inflation at 1.9% y/y, while online prices indicate 2.5% y/y. That could translate into higher-than-expected inflation rates "over the next few months," giving the Fed room to continue tightening at a regular but not aggressive pace. Thus, the Fed will tighten policy more quickly than other key central banks, and although there are periods when yields are not a driver of currencies, in medium term This happens almost always.
Also, judging by the positioning, investors have prepared for a weakening dollar, and this suggests that trading in this vein has already exhausted itself and a short-term correction is now looming. Short positions in futures markets U.S. $ are at a 5-year high, and this is a big market distortion, Crownover notes. The dollar will receive additional support amid the implementation of measures at the beginning of 2018 that will bring trillions of dollars of American companies back home from abroad, the strategist recalls. “We really believe that there will be another law in the US domestic investments
" says Crownover, citing legislation that gives tax relief to companies that repatriate their assets from abroad. “A similar law in 2005 helped return impressive amounts of funds to the States.” “It didn't have the noticeable impact on the real economy that many had hoped, but it did impact the dollar, which declined in 2003 and 2004 before rising 10% in 2015, largely due to the tax amnesty.” Finally, we won’t be shocked if Yellen stays for a second term after her term expires in February, but it is increasingly likely that Kevin Warsh will still head the Central Bank, the expert admits. " Good news “The fact is that Warsh is a former Fed official who believes in the independence of the Central Bank,” Crownover emphasized. “At a minimum, the regulator will continue its cycle of rate hikes and may accelerate the pace of tightening due to concerns about how low interest rates have contributed to the accumulation of such huge debts around the world. And as history shows, when you have large debts that accumulated quite quickly against the backdrop of inflated asset prices, as a rule, this does not threaten anything good real economy
", Crownover noted. Tuesday was different from Monday as the market was suddenly gripped by a wave of fears about the global economic growth outlook. Moreover, it all started in Asia and resulted in a sharp demand for the yen.USD/ JPY at the moment touched the 1.5-year low of 109.94, but turned upward after the Bank of Japan came out with traditional verbal interventions. The Japanese regulator suddenly started talking about a possible expansion of the economic stimulus program as early as April. In addition, the spotlight was on the coupleUSD AUD/
, which slid sharply to a low of 0.7509, bouncing off a high of 0.7631 after the Reserve Bank of Australia's speech. stock indices moved into the red zone due to an emergency situation financial market a wave of fears about the prospects for the global economy. Suffered more than others Nikkei (NKD), which lost 8.33% during the day. Meanwhile, Brent updated the monthly low at 37.26, after which. Gold against the backdrop of everything that was happening, it perked up, reaching the 1230 mark.
Daily schedule:
- Reserve Bank of India cuts rates for the fifth time times since the beginning of 2015 to 6.5%
- The Reserve Bank of Australia left rates unchanged, but lamented the strength of the Australian dollar.
- Eurozone: March, compositePMI 53.1 vs. forecast53,7
ForecastonWednesday, 6 April
Stock market
Please note that the top decliners on Tuesday were two indices representing two export-oriented countries, with the currencies of these countries currently serving as risk-free safe-haven assets. Japanese Nikkei (NKD) fell by 8.45%, and the German DAX (FDAX)– by 3.4%. In the story with the Japanese benchmark, the sharply rising yen also played a role, which suddenly reached a 1.5-year high. Considering the fact that the Bank of Japan has already expressed its dissatisfaction with this behavior of the national currency, as well as the fact that most of the country’s corporations have hedged in the area of 115.00 for the pair Tuesday was different from Monday as the market was suddenly gripped by a wave of fears about the global economic growth outlook. Moreover, it all started in Asia and resulted in a sharp demand for the yen.USD/, the regulator will in the near future try in every possible way to convince the market to sell the yen, which will undoubtedly support demand for Nikkei. The nearest target on the way up could be 16,000.
Commodity market
