Comments by Westpac's economist, Elliot Clarke
- AUD/USD may fall to 0.70 in 2H 2019
- Due to lower commodity prices and rising US interest rates
- Commodity prices will be a clear negative over the next 12 months
- Foresees a 16% decline in Australia's commodity index
- Anticipates Fed to hike in September, followed by two more in March and June 2019
- Three further Fed rate hikes will take cash rate differential to -112 bps against RBA
- Risks to inflation and fiscal uncertainty in the US are set to keep Treasury yields well ahead of those in Australia, further adding to the US dollar
- AUD/USD unlikely to fall below 0.70 though, as demand for Australia's financial assets remains 'abnormally strong'
I highlighted the case of Australia's bond yields piling on more misery on the currency last week here. And with continued divergence between the two central banks, it is a very straightforward factor to support a case for a lower AUD/USD and it is one that will only grow stronger over time - given that the RBA is standing still and the Fed continues to hike.
The yields spread between Australia and US' 10-year bonds have fallen to 26 bps in favour of the US now, and that's the lowest it has been since the 1980's.
