Westpac on the USD and AUD: AUD/USD will be dominated by the USD

Author: Eamonn Sheridan | Category: News

Forecasts from WPAC for the AUD/USD:

  • end 2018 forecast from USD0.73 to USD0.72
  • to USD0.70 through the first half of 2019

Some of the commentary from the report (in summary)

  • on the basis of the export price basket, the Australian dollar looks under-valued
  • there is a looser relationship between the AUD/USD and the AU/US interest rate differential

Risks to our current forecasts centre around Fed policy

  • Our central view is that the Fed will tighten four more times in this cycle with the tightening cycle coming to an end in June next year
  • Further Fed hikes in the second half of 2019 would extend that interest rate differential beyond our central view and put additional downward pressure on the AUD even if the basket of export prices holds up
  • our central view is that the peak in the USD will be around the June quarter 2019 when the market abruptly shifts to recognising that the Federal Funds rate has peaked
Looking further out
  • In extending our forecasts through 2020 we believe that the issues driving the AUD/USD cross will be dominated by the USD. With the Fed expected to go on hold by mid-2019, markets moving to price in rate cuts and the US yield curve inverting through 2020, the consequent weakening of the USD should see AUD lifting through 2020 to USD0.75 by year's end.

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