The Australian
and US dollar cross rate has fallen 13.8 percent over the past year,
tempting analysts from all backgrounds to take on the endeavour of
surmising its ultimate fate. An influx of speculation on central bank
policies, trade outlook, bond prices, commodity prices and housing
prices have been force fed to those looking for insights. Virtually
all aspects of the economics textbook have been passed on as “key
indicators” on the Australian dollar’s movement.
So, who do we believe?
Under pressure from the torrent of expansionary policies across global
economies and various sluggish economic indicators, the Reserve Bank
of Australia (RBA) reduced the cash rate to 2.25 percent in February
2015. Following the news, economists at two of Australia’s largest
banks pinned the average cross rate to just below A$0.75. Although one
was more pessimistic than the other, both recognised the rate cut as
necessary and one expects another cut towards the end of the year.
Economists consider the bulk of the Australian dollar’s decline
against the US dollar to have already occurred and the now lowered
rate will start to drive key export growth, causing the currency pair
to enter a period of stabilisation.
Australian businesses agree with the economists. In East & Partners
(E&P) research conducted in February 2015 based on forecasts made by
CFOs and Treasurers in Australian trade businesses, the AUD/USD
average cross rate consensus reached A$0.76 for the remainder of 2015.
Over 80 percent of trade businesses are confident that the Australian
dollar’s short term, drastic depreciation due to trade deficit will be
self-corrective as service exports become more attractive to foreign
buyers.
At the opposite end of the spectrum, fixed income analysts expect the
pair to trade at as low as A$0.50, eliminating conservatism from its
core. Basing their calculations on the differentials between Australia
and the US’s five-year bond yields, fixed income analysts deduced that
if the only other time the differential settled at 50 basis points was
when the pair was trading below 50 cents, the cross rate will fall
towards the same level again in the medium term. |
Incredible, yes. Improbable, no.
Investors who are
currently accessing low cost funds in the US and investing in
Australia’s higher yielding assets are already pulling back. Following
the US Federal Reserve’s rate hike and the RBA’s recent cash rate
ease, the AUD/USD cross rate has already dropped 1.78 percent since
early February. If the economists are correct and the two central
banks continue to extend their respective monetary policies, the cross
rate could indeed fall below the 50 cent mark.
Fund managers who focus on Australia’s resource exports on the other
hand expect the cross rate to reach A$0.70 over the next few months,
amid the recent slump in resource and energy commodities. This is a
near ten percent depreciation on top of the 4.6 percent the pair’s
cross rate has already experienced since the beginning of the year.
The decline is mostly triggered by flat income due to depressed
Liquefied Natural Gas (LNG) and iron ore prices, which by extension,
are dismantling Australia’s current account. This coupled with the
current downbeat consumer sentiment, has exacerbated the expectation
which many see as the final demise of the resource boom.
The relationship between export demand and the level of AUD/USD cross
rate has been further explored in other, separate research conducted
by E&P. Between August and November 2014, trade businesses with
turnovers A$500 million or more expected their exports to grow by 9.8
percent, during which the AUD/USD cross rate fell by approximately 9.1
percent. For the quarter after, these businesses expected their
exports to grow by 10.1 percent, during which the AUD/USD cross rate
fell by close to 10.9 percent. If this relationship holds, the latest
forecast of 10.9 percent export growth will see the AUD/USD fall to
A$0.69 by June 2015, synonymous to predictions made by the fund
managers.
Faced with such multifaceted views and opinions, we should be
listening to those Australian enterprises whose business success or
otherwise is glued to their AUD/USD predictions and the strategies
they deploy and invest in. |