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Bill Evans, Research Analyst at Westpac, suggests that they are slightly lowering their end 2018 forecast from USD0.73 to USD0.72 and continue to expect the final adjustment in the profile to USD0.70 to play out through the first half of 2019.

Key Quotes

“Over the last month the Australian dollar has fallen from around USD0.74 to USD0.71 and is now settling around USD0.715. The AUD is closing in on our mid 2019 forecast of USD0.70 at a much faster pace than we had envisaged.”

“Disappointing developments in Europe; an ongoing slowdown in China; and some instability amongst some emerging markets support our view that global growth in 2019 will slow from 3.8% to 3.6% with further weakness expected in 2020.”

“Foreign investors remain nervous about Australia’s housing market given Australia’s high household debt and stretched affordability.”

“Political uncertainty has also been a factor for markets following the recent leadership change in our Federal Government.”

“Last month we reaffirmed the target of USD0.70 for the AUD (around USD0.74 at the time) by mid-2019. The move to USD0.715 has run ahead of our timetable.”

“Fears of a global trade war and general contagion through emerging markets seem to be dictating this current development. We would argue that these two factors will prove to be largely transient in terms of implications for the AUD.”

“While the trade dispute between the US and China could escalate and certainly has further to run, we strongly doubt that a bilateral dispute is likely to spread globally – a view that appears to have driven the recent sharp drop in the AUD.”

“Accordingly we are slightly lowering our end 2018 forecast from USD0.73 to USD0.72 and expect the final adjustment in the profile to USD0.70 to play out through the first half of 2019.”

“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.”

“Nevertheless 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. 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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