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2018 outlook for the Australian dollar

2018 outlook for the Australian dollar

CommBank currency strategists forecast possible Australian dollar valuations for 2018 compared with some of the other major global currencies, highlighting potential risks expected throughout the year.

CommBank currency strategists have made forecasts for the Australian dollar (AUD) for 2018 against the value of the US dollar and other major global currencies, known as the major cross rates.

A trading range is the high of the year compared with the low of the year. It is an indicator of volatility.

"Trading ranges vary by currency pair," CommBank strategists explained in a note. "AUD is very volatile against the Japanese yen with an annual trading range of 26% per year. AUD is least volatile against the New Zealand dollar (12.2%).

"A cynic might call this the ‘disclaimer’ part of our note. We consider it an important reminder that AUD’s inherent volatility makes it difficult to forecast and manage currency exposure."

Australian dollar (AUD) and the US dollar (USD)

"AUD/USD ended 2017 at 0.7809, quite close to our forecast of 0.7800. AUD has got off to a solid start against the USD so far in 2018 and looks set to hit our end‑2018 forecast of 0.8300 sooner rather than later.

"Part of the strength in AUD reflects a weak USD, improving Australian and global economies, higher commodity prices and a structural improvement in Australia's current account deficit."

Australian dollar and the euro (EUR)

"We expect AUD/EUR to track around 0.6535 (EUR/AUD around 1.53022) by the end of 2018.

"AUD/EUR is influenced by the state of the global economy. A stronger global economy typically translates into a higher AUD/EUR until the Eurozone economy joins the global economy’s stronger trajectory. At that point, EUR tends to appreciate against AUD and most currencies. The reason AUD/EUR will remain in a range is commodity prices typically increase when the global economy improves."

"Judging by recent comments from the ECB, the risks are rising that the ECB ends its asset purchases and begins to increase its policy interest rates sooner rather than later. This risk is a downside to our AUD/EUR forecasts."

Italy holds elections on 4 March 2018. The outcome might result in a referendum on euro membership. 

"An Italian referendum on the euro is a low probability in 2018. If it occurs, it would be an upside risk to AUD/EUR because EUR would fall strongly against all currencies because of the rising risk of Italian exit."

Australian dollar and the UK/British pound (GBP)

"We expect AUD/GBP to track higher to 0.5845 (GBP/AUD at 1.7109) by the end of 2018. We state upfront, of the currency pairs discussed in this note, we have the lowest conviction in our AUD/GBP forecasts because of the great political uncertainty in the UK.

"The referendum to exit the European Union (EU) in 2016 could be the defining moment for the UK economy this century. The full ramifications of the UK’s exit from the EU cannot yet be estimated because we do not know even the broad outlines of a trade agreement between the UK and the EU. This underlines our lack of conviction in AUD/GBP."

Australian dollar and the Japanese yen (JPY)

"We expect AUD/JPY to ease slightly by 1% to 87.15 by the end of 2018. However, AUD/JPY is very volatile. AUD/JPY has a 12% average trading range per quarter. Even if our forecasts are precise, AUD/JPY will not move in a straight direction from current levels down to 87.15.

"The small decrease we forecast in AUD/JPY largely reflects Japan’s very large current account surplus of around 4% of GDP. That large current account surplus, and associated large net international investment position, also makes AUD/JPY very sensitive to financial market volatility.

"Volatility has been low in recent years - supporting a higher AUD/JPY - but this could change as more central banks tighten monetary policy."

Australian dollar and the New Zealand dollar (NZD)

"We expect AUD/NZD to increase slightly by 1% to 1.1067 (NZD/AUD to 0.9036) by the end of 2018, but spend most of the year under downward pressure.

"AUD/NZD tends to fall when the global economy strengthens because New Zealand’s economy (exports 30% of GDP) is more open than Australia's (exports 22% of GDP). Nevertheless, AUD/NZD is relatively stable compared to other cross rates because similar global factors move both AUD and NZD by similar amounts. 

"The risk to our forecasts is an even stronger increase in AUD/NZD. Respective interest rate differentials will drive the final appreciation of AUD/NZD into year‑end.

"While New Zealand’s cash rate at 1.75% is higher than Australia’s [currently at 1.5%], the outlook is more in favour of firmer Australian rates sooner than in NZ. We expect the Reserve Bank of Australia to start its tightening cycle in November 2018. This is a little before our expected start of tightening by the Reserve Bank of New Zealand in February 2019."

Australian dollar and China's yuan (CNY)

"We predict AUD/CNY will lift by 2.9% to 5.2705 by year end. Because USD/CNY is relatively tightly controlled by the People’s Bank of China, almost all the movement in AUD/CNY reflects movements in AUD/USD."

CommBank currency strategists expect AUD/USD, and therefore AUD/CNY, to lift for the following four reasons:

  • depreciation in the USD
  • commodity prices remaining supported because the global economy is experiencing its first synchronised upswing for a number of years, underpinning Australia’s terms of trade
  • Australia’s current account deficit is narrow, generating a higher fundamental valuation in the AUD
  • Australian interest rate expectations have scope to adjust higher in favour of AUD as the economy continues to improve

Australian dollar and the Canadian dollar (CAD)

"We predict AUD/CAD will decrease by 1% to 0.9794 by year end. First, we expect Canada’s terms of trade to increase more than Australia’s terms of trade. As a rough guide, crude oil prices are outperforming iron ore prices.

"Second, the Bank of Canada has already started a tightening cycle and we expect at least three more interest rate increases over 2018 and 2019. By contrast, we expect the Reserve Bank of Australia to start its interest rate tightening cycle in late 2018 and hike only twice in 2019."

Risks to the forecast include a collapse of the North American Free Trade Agreement (NAFTA) between Canada, the US and Mexico and if the interest rate market begins to price more aggressive RBA interest rate rises.

Things to consider: This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or other financial instruments. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You should consider whether any advice or recommendation in this research is suitable for your particular circumstances, and if appropriate, seek professional advice, including tax advice. The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank" or "CBA") believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held based on the information available at the time of its compilation but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made in this report. Any opinions, conclusions or recommendations of the Bank contained in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by other business units of the Group. The Bank is under no obligation to update or keep current the information in this report. None of the entities within the Group or their directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. Any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or warranty by or on behalf of the Group or any person or entity within the Group that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realised. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or other financial instrument mentioned in this report. In addition, investors in securities, such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Financial markets products and financial instruments (collectively "product") have an element of risk. The level of risk varies depending on the products specific attributes and how it is used. Potential investors should note that the products discussed in the report may be sophisticated financial products which involve dealing in derivatives. Unless you are familiar with products of this type, they may not be suitable for you. 

This report is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or other financial instruments. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. You should consider whether any advice or recommendation in this research is suitable for your particular circumstances, and if appropriate, seek professional advice, including tax advice. The Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 ("the Bank" or "CBA") believes that the information in this report is correct and any opinions, conclusions or recommendations are reasonably held based on the information available at the time of its compilation but no representation or warranty, either expressed or implied, is made or provided as to accuracy, reliability or completeness of any statement made in this report. Any opinions, conclusions or recommendations of the Bank contained in this report are subject to change without notice and may differ or be contrary to the opinions, conclusions or recommendations expressed by other business units of the Group. The Bank is under no obligation to update or keep current the information in this report. None of the entities within the Group or their directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. Any valuations, projections and forecasts contained in this report are based on a number of assumptions and estimates and are subject to contingencies and uncertainties. The inclusion of any such valuations, projections and forecasts in this report should not be regarded as a representation or warranty by or on behalf of the Group or any person or entity within the Group that such valuations, projections and forecasts or their underlying assumptions and estimates will be met or realised. Past performance is not a reliable indicator of future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or other financial instrument mentioned in this report. In addition, investors in securities, such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk. Financial markets products and financial instruments (collectively "product") have an element of risk. The level of risk varies depending on the products specific attributes and how it is used. Potential investors should note that the products discussed in the report may be sophisticated financial products which involve dealing in derivatives. Unless you are familiar with products of this type, they may not be suitable for you.