Analysts have yet again downgraded their forecasts for the Australian and New Zealand dollars, as monetary easing in both countries and the risks of further rate cuts in the face of global trade frictions and slowing growth sap risk appetite. The broad outlook for both currencies over the next year, however, wasn't too gloomy as the U.S dollar was facing pressure in its backyard on bets the Federal Reserve will cut rates before year-end.
The Aussie is now seen at $0.6900 in three months' time, down from $0.7100 expected in the previous poll in May, according to the median prediction of up to 45 analysts in a Reuters poll. It was last fetching $0.6970. The Aussie has traded in a 68-72 US cent range in the past three months and analysts expect more of the same until mid-2020. The median forecast is now for $0.7200 for the year ahead, compared with expectations for $0.7300 in May.
That is still a brave call given souring risk appetite and global recession fears as Sino-US trade tensions show no signs of easing. At the same, Australia's central bank has switched to a more accommodative policy path in the face of a darkening outlook for growth, rising unemployment and lukewarm inflation. Earlier this week, the Reserve Bank of Australia (RBA) cut rates to a new record low of 1.25%.
"Lower Australian interest rates and a near-term RBA rate cut are obvious catalysts to put downward pressure on AUD/USD," Commonwealth Bank currency strategist Richard Grace said in a note. Financial markets are fully pricing in one more cut to 1.00% by August and a 50-50 chance of a third move by December. "We have lowered the September quarter AUD/USD forecast to $0.6800 to account for the central economic forecast of an August RBA rate cut," Grace said.
"We do not expect further easing in 2020 given the economy should respond to the significant easing in policy. We have therefore left our year-end AUD/USD forecast unchanged at 0.7200 implying a modest recovery in AUD/US." The Aussie started the year near $0.7300 but has steadily declined on disappointing domestic data, while overall confidence has been hit by slowing global growth amid an escalating Sino-US trade war.
The Aussie is finding some support from higher prices of its key iron ore export which has boosted government income by billions of dollars. Data on Wednesday showed exports climbed 15% in the year to March to reach a record A$452 billion, which spilled over into company profits, dividends and tax receipts. Another reason for a relatively resilient Aussie is expectations for more aggressive policy easing in the United States, with the rates market there now pricing in a full 100 basis point cut by mid-2020.
The dovish Fed bets have sent the US dollar spinning lower against a basket of major currencies. This might explain the wide range of forecasts for the Aussie on a 12-month view - from as low as $0.6400 to as high as $0.81 - highlighting the challenge of predicting currency moves. The median forecasts were also downgraded for the kiwi, putting it at $0.6600 in three months and six months, and $0.6700 on a one-year view.
The currency was at $0.6630 on Thursday, having slipped in the past month after the Reserve Bank of New Zealand cut its cash rate to a record low 1.50%. Overnight indexed swaps, which track expectations for official rates, have dropped to 1.2419% for a year ahead, well under the current cash rate.
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