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What is the outlook for the
Australian dollar?
Listen to audio via your computer speakers or
headset, or you may phone in to listen via the
number on your reminder email.The Questions
PaneModerator
Jackson Hewett
Editor
Business Spectator
Panellists
Adam Carr
Market Economist
Business Spectator
Ray Attrill
Global Co‐Head of FX Strategy
NABThe AUD roller coaster
Adam Carr
Market Economist
Business SpectatorThe AUD trading range and key support
1.20
$US
1.10
Current trading range: 0.95
1.00 to 1.05
0.90
0.80 Key support levels
0.70
0.60
1/06/2007 1/06/2008 1/06/2009 1/06/2010 1/06/2011 1/06/2012 1/06/200.80
0.85
0.90
0.95
1.00
1.05
1.10
1/06/2009 1.15
1/08/2009
$US
1/10/2009
1/12/2009
1/02/2010
1/04/2010
fears
1/06/2010 Greek
1/08/2010
1/10/2010
1/12/2010
1/02/2011
1/04/2011
1/06/2011
1/08/2011
1/10/2011
dip fears
1/12/2011
and US double
Euroepan crisis
1/02/2012
1/04/2012
1/06/2012
The AUD roller coaster
flares up
1/08/2012
Spanish and
1/10/2012
Italian debt crisis
1/12/2012
QE and
1/02/2013
1/04/2013
recesssion fears?
1/06/2013Many, often conflicting theories as to
what drives FX, none really works well
• Flow models – Balance of payments, current
account , capital account etc
• Parity conditions
– Purchasing power parity: Countries with higher
inflation should devalue and those with lower rise
– Interest rate parity: higher interest rates now mean
future depreciation
• Related to both of those are things like economic
growth rates, budget deficits, public and foreign
debt, risk perceptions etc.• Flow and parity theories can conflict. Eg ‐ flow models suggest higher interest rates mean higher exchange rate as portfolio investment flows flow in. • Parity conditions would suggest opposite – high interest rates associated with higher inflation and lower growth ‐ means that currency should depreciate.
That’s why models of exchange rates and estimates of fair value aren’t worth very much
Will the AUD head to 85 cents? The $A is still receiving tremendous support, none of which has changed materially. So we have: • The carry trade, where investors can borrow at close to 0% in the US, Europe, UK and Japan and invest in higher‐yielding currencies like the $A. • High commodity prices – the terms of trade is down 15% from its peak but is still some 50% above its long‐term average. • A current account deficit that is around half the historical average at 2.2%. • Some of the best public finances in the developed world, and one of the smallest public debt burdens. • Australia has, and is continuing to record, stronger economic growth.
Will the AUD head to 85 cents? Despite the points mentioned on the previous slide, the narrative is that 1. The mining boom is over 2. Domestic growth is slowing 3. China is slowing 4. The Fed might taper QE
How will lower dollar impact economy? • theory is that a lower exchange rate boost exports, enhances earnings for exporters etc and generally acts a shock absorber for a weak economy. So its good right? • The issue for me is causality. Historically, an elevated exchange rate is a consequence of a strong economy.
How will lower dollar impact economy? • A weak currency is useful in the face of an actual global shock. GFC, Asian financial crisis. • In the absence of that?
What does lower AUD mean for
interest rates
• Well that depends – what's the target?Investment and trading strategies
under a more volatile currency
• Don’t put too much faith in anyone’s forecasts
• HEDGE!!!!
• Global investors don’t like exchange rate
volatility – not good for our stocks , especially
if associated with a downturn.
• Weaker AUD – Aussie equity
underperformanceFX OUTLOOK:
The 80 Cent Dollar – Why, and if so, When?
Ray Attrill, Head of Currency Strategy
The 80 Cent Dollar – Why and if so When? June 201317
The 80 Cent Dollar – Why, and if so When?
• What has driven the A$’s fall from above parity to below 95c?
• The significance of the shift in market expectations about when the Fed might begin to dial
down its Quantative Easing Policy cannot be overestimated
• Nor too should the sharp rise in currency market volatility which has killed the attractions
of the AUD carry trade
• The A$’s short term ‘fair value’ has fallen significantly as effective US interest rates have
become less negative anticipating the ‘tapering’ of Fed QE
• At a point where the Fed can exit from its unconventional policy settings, fair value for the
A$ drops to near 80 cents – but this should not happen quickly
• Technically, the 0.94 area is very important; failure to convincingly break below here offers
hope for consolidation of recent loses
• As does the fact that speculative traders are already short A$ in record amount
Ray Attrill, Global Co-Head of FX Strategy ray.attrill@nab.com.au
The 80 Cent Dollar – Why and if so When? June 201318
Origins of AUD’s fall from grace lie with US bond yields
• Terms of Trade have peaked – in Q3 2012 about 14% below their 2011 highs
The 80 Cent Dollar – Why and if so When? June 201319
AUD FX volatility has virtually doubled since April....
The 80 Cent Dollar – Why and if so When? June 201320
...killing the attraction of the currency carry trade
The 80 Cent Dollar – Why and if so When? June 201321
AUD - estimate of short term fair value versus actual AUD/USD
AUD/USD
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
0.80
Short term fair value
0.75 = 0.9580 @ 31/05/13
0.70
0.65 AUD/USD Spot
0.60 +1 Std Dev Present Value Model
0.55
-1 Std Dev Present Value Model
0.50
0.45
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Source: Bloomberg, NAB, Krippner (RBNZ), Based on 'Shadow' swap spread, industrial metals, VIX
• ‘Predicted’ value based on AU 1-year swap, US ‘Shadow Short Rate’, metals prices and VIX
• If the US Shadow Short Rate rises to zero, AUD fair value estimate falls to ~083 cents
The 80 Cent Dollar – Why and if so When? June 201322
AUD technical view - 0.94 level is key and not yet convincing broken
1.15
1.1020
1.10
1.05
1.00 0.99
0.95
0.90
0.8450 Triangle
0.85
Target
0.80
Sep-09 Sep-10 Sep-11 Sep-12
The 80 Cent Dollar – Why and if so When? June 201323
AUD speculative traders (IMM) running record short positions
AUD speculative positions*
Net long positions, 000 contracts AUD/USD
120 1.10
100 1.05
1.00
80 Positions (lhs) AUD/USD (rhs)
0.95
60 0.90
40 0.85
0.80
20
0.75
0 0.70
-20 0.65
0.60
-40
0.55
-60 0.50
-80 0.45
Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11
* Commitment of traders non-commercial futures positions. Source: CFTC, National Australia Bank
The 80 Cent Dollar – Why and if so When? June 201324
NAB FX Strategy Targets
17/06/2013 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14
Australian Dollar AUD/USD 0.96 0.95 0.94 0.93 0.92 0.90 0.88 0.87
New Zealand Dollar NZD/USD 0.81 0.81 0.82 0.83 0.82 0.80 0.79 0.79
Japanese yen USD/JPY 95 100 104 105 107 110 111 112
Euro EUR/USD 1.33 1.29 1.27 1.27 1.24 1.22 1.20 1.18
British Pound GBP/USD 1.57 1.51 1.49 1.48 1.46 1.44 1.42 1.40
Swiss Franc USD/CHF 0.92 0.97 0.98 0.97 1.00 1.02 1.04 1.06
Canadian Dollar USD/CAD 1.02 1.03 1.03 1.02 1.03 1.02 1.02 1.01
Chinese New Yuan USD/CNY 6.13 6.14 6.12 6.10 6.10 6.10 6.10 6.10
Crosses
AUD/NZD 1.19 1.17 1.15 1.12 1.12 1.13 1.11 1.10
AUD/JPY 91 95 98 98 98 99 98 97
AUD/EUR 0.72 0.73 0.74 0.73 0.74 0.74 0.73 0.74
AUD/GBP 0.61 0.63 0.63 0.63 0.63 0.63 0.62 0.62
AUD/CHF 0.89 0.92 0.92 0.90 0.92 0.92 0.92 0.92
AUD/CAD 0.98 0.97 0.97 0.95 0.95 0.92 0.90 0.88
AUD/SGD 1.20 1.17 1.18 1.16 1.15 1.13 1.10 1.09
AUD/KRW 1084 1087 1093 1093 1081 1058 1034 1022
AUD/CNY 5.89 5.80 5.75 5.67 5.61 5.49 5.37 5.31
Trade-Weighted Index AUD TWI 72.60 72.88 73.13 72.45 71.76 71.18 70.34 69.09
The 80 Cent Dollar – Why and if so When? June 201325
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The 80 Cent Dollar – Why and if so When? June 2013&
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