Aussie dollar forecast lower

12 September 2017

The Australian dollar continued to strengthen against the US dollar into early September, supported by ongoing US dollar weakness. Since the turn of the calendar year, the Australian dollar has appreciated 11% against its US counterpart – currently trading at 80US¢.

On the 8th September the A$ breached 81US¢ - the highest since May 2015. For now, the market has shown a level of resistance at 81US¢ and the majority of major banks forecast the A$ to finish 2017 lower than the current rate (forecasts range from 75-79US¢ for December 2017).

Any changes to monetary policy from the respective reserve banks before the end of the year would undoubtedly see shifts in the exchange rate, however the market sentiment appears to be that interest rate hikes are looking progressively unlikely from both the Reserve bank of Australia (RBA) and US federal reserve.

US inflation continues to track below that of the 2% targeted by US federal reserve before any interest rate increases would be considered. Furthermore, with the recent disruption caused by several hurricanes in the United States, the prospect of interest rate increases before December look less certain.

The RBA recently kept interest rates at record lows of 1.5%, as wage growth remains below desired levels. Industry participants also note that the RBA might be deterred by any potential rate increases as result of the stronger Australian dollar. Given Australia exports about 70% of beef production and 55% of sheepmeat production, a stronger Australian dollar challenges the competitiveness of Australian product in the global market.

As the global political landscape has shifted significantly over the past year, there is potential for greater volatility in currency markets until the end of the year.

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