Globally, armies of highly educated economists embark on lucrative careers pitting their knowledge against real world markets to try and determine the outlook for currencies, with very mixed results.
Empirically a few factors have demonstrated a consistent link with movements in the AUD: commodity prices; interest rate and inflation differentials; and good old fashioned investor speculation. Each of these factors has a myriad of drivers and influences that can cause both short and long term impacts on exchange rates.
But if it’s forecasting certainty you want, then your local meteorologist likely has a much more accurate outlook over the next few months.
Persistent Strength Frustrating RBA
The challenge for the RBA at present is that the currency is not doing what it’s ‘supposed to do’. Lower commodity prices and low interest rates have not been enough to weaken the AUD, which historically they have been known to do.
Recent RBA commentary was construed by the market to indicate an interest rate raising bias, however the RBA has tempered expectations in more recent speeches. It is possible that the AUD’s strength versus the USD is actually an outcome of a weakening USD. This is on the back of a softening in expectations for the speed of interest rate increases there, as well as some doubt entering the market in relation to the ability of the Trump administration to implement its pro-business and infrastructure spending agenda.
Pitcher Partners sees some softening to come
We remain of the view that a cautious economic outlook, low inflation and high consumer debt will keep a lid on interest rates for some time and this, along with commodity prices that remain soft compared to the past several years, will push the AUD lower over time. However, this position is subject to:
- Relative interest rates and inflation
- Commodity prices and Australia’s terms of trade