Unpredictable Australian Dollar Under Pressure
(19 June 2018 - Australia) According to BlackRock the Australian Dollar could fall to 70 cents against the US Dollar in 2018 as the country’s interest rate differential against the US grows and Chinese economic growth eases.
The Federal Reserve has raised the cash rate seven times since December 2015, while the Reserve Bank of Australia is forecast to maintain the cash rate at record low until at least the middle of next year. The Aussie Dollar fell below 74 cents for the first time in a year last week as trade war fears grow between China and the US. The currency faces more pressure as policy divergence sees Australian bond yields drop further below US Treasuries “There are conditions that could get it there -- rate differentials is definitely one of them, the potential for China slowing is another,” said Craig Vardy, BlackRock’s head of fixed income for Australia. Slowing local lending growth may also add strain to the economy and currency.
The Aussie may extend declines to 65 cents by Q2 2019, Pendal Group said last week, while Westpac predicts it may drop to 70 cents in 2019. Australia’s 10-year bond yield fell five basis points Tuesday to close at 2.62 percent, compared with 2.90 percent for similar-maturity U.S. Treasuries. The US economy shows no signs of slowing down, underpinning recent US dollar gain. Further Fed tightening should see benchmark Treasury yields climb to 3.25 percent by the end of 2018 with four more hikes before the end of 2019. “You’ve got a Fed tightening, and you’ve got the Bank of Japan, the European Central Bank, the other key central banks, not really wanting to do anything,” he said. “It absolutely points to a stronger dollar.” China announced it would lower its reserve requirement ratio to increase small business lending, spurring a short term recovery in the AUDUSD to one week highs in conjunction with a rally in commodity prices.
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