Australian and New Zealand Dollars are Elevated, Must Come Down
Standard Chartered have told clients they are forecasting downside pressures on the Australian and New Zealand dollars to resume.
Both the New Zealand and Australian dollars have trended higher in global FX as of late with both benefiting from a recovery in global commodity prices.
October has been particularly good for the AUD and NZD which both tracked the CRB Index higher; the CRB is currently made up of 19 commodities.
Commodity prices have since cooled, and with it the recovery rallies in the trans-Tasman currencies which confirms that the near-term outlook is turning softer once more and a near-term cap on AUD and NZD may be forming.
AUD Outlook: Further Depreciation
Standard Chartered analysts, in a monthly foreign exchange forecast note, say they continue to expect further downside in the AUD.
"In our view, the currency is likely to adjust further to the prevailing domestic macroeconomic scenario while remaining vulnerable to further negative surprises from China. Since we do not see a rebound in commodity prices in the near term, we
believe Australia’s trade fundamentals are likely to remain weak."
In addition, other leading indicators of growth, such as consumer and business confidence, signal further deceleration while the unemployment rate remains elevated near 2008 levels.
"In our view, the RBA is likely to opt for additional rate cuts, should the growth outlook continue to deteriorate," say Standard Chartered.
The minutes from the RBA’s October meetingreleased on the 20th of October suggested little change for the near term path for monetary policy.
While there are clearly concerns over growth prospects in China and East Asia, on the domestic front the tone was quintessentially ‘glass half full’.
"We continue to expect the RBA to wait until next year to cut rates, when the stimulus from housing and the lower AUD are likely to fade," says Felicity Emmett at ANZ Research, echoing the viewpoint held at Standard Chartered.
Should markets begin to price in a similar rate cut preference then the outlook could rapidly turn against the Australian dollar.
NZD Outlook: Too High, Must Come Down
Standard Chartered meanwhile advise that they turn bearish on the NZD from neutral previously:
"We believe the NZD remains elevated, with respect to history as well as economic fundamentals, despite the significant decline. We believe the significant and continuing deterioration in dairy prices will further weigh on growth. This is likely to prompt the RBNZ to further ease policy, beyond what we had initially expected."
