Westpac on the Australian dollar:
I've summarised, and bolding mine also:
- The past two months have seen a number of forces weigh on the currency, most notably commodity prices and US monetary policy.
- Firstly on commodities ... iron ore ... low-cost supply from countries such as Australia continued to grow; and global growth remained modest. Since late-February, there has been strong evidence of these forces taking hold ...
- Futures pricing argues that market participants are increasingly becoming resigned to the current downtrend continuing ...
- The price of Australia's other key commodities are also turning lower ... coking coal ... the oil price has also declined
- further weakness in Australia's key commodities through 2017, it is the second leg down come 2018 that we anticipate will have the largest impact on the Australian dollar. From our current year-end target of USD0.73, which is broadly in line with the current spot price, we expect the Australian dollar to depreciate to USD0.65 by end-2018.
- circa 30% decline in the price of iron ore through 2018 and a 40% fall for coking coal. Oil (Brent) is seen down a more modest 18%.
- The other key factor behind our profile for the Australian dollar remains global monetary policy, in particular ... the US Federal Reserve.
- In the US, there remains a material disparity between sentiment/employment and spending. While it is certainly the case that GDP growth in the March quarter (which was a very poor at 0.7% annualised) was affected by weather and an inventory draw, the bigger question remains why average growth in domestic demand can seemingly not accelerate away from circa 2%yr - a pace it has now sustained over five years, and one that is little more than half that seen in the decade preceding the GFC (to end-2005).
- However, even omitting the positive lead for the growth outlook that the FOMC will continue to take from the sentiment and employment data, 2%yr growth is 'good enough' to justify a continuation of the Committee's 'gradual' policy normalisation.
- We continue to believe that the next steps in this journey will be a 25bp increase at each of the June and December meetings, to be followed by a small reduction in the size of the balance sheet from the beginning of 2018.
- Combined with a further two rate hikes in March and September 2018
- As it stands, market pricing is only factoring in three rate hikes by the FOMC to late-2018 compared to our four and the FOMC's five
- Further, it is also difficult to assess whether the potential consequences of balance sheet normalisation and higher term interests have been factored into the market's current valuation of the US dollar
- As a final point, it is also worth highlighting that the recent run of Australian domestic data has, on the whole, been a negative for the Australian dollar. Albeit weather affected, available partial data for retail sales points to a broadly flat outcome for the March quarter. Further, expectations regarding family finances and spending intentions as well as considerable slack in the labour market and the looming downturn in residential construction indicate that risks regarding the consumer in 2017 and 2018 are to the downside.
- As was apparent in the Federal Budget and recent communications from the RBA, authorities remain constructive on the outlook. Yet to our mind, there is good cause to highlight the downside risks, and bear particularly close attention to developments around the consumer. An RBA on hold throughout the forecast period will do little to offset stronger momentum and sentiment offshore.
