Australian Dollar: Compilation of Major Bank Forecasts, Currency Views for 2018

"Australian fundamentals are solid, but the RBA has already flagged its resistance to joining other central banks in normalising interest rates," - UniCredit Bank.

The Australian Dollar could face another testing time in 2018, according to some of the latest forecasts from the analyst community, as a range of factors conspire to keep the Aussie on the back foot.

Projections of hardship ahead come at the tail end of a year that saw the Australian currency go from hero, at the beginning of 2017, to zero in the final quarter.

This was after macroeconomic conditions appeared to scupper any last surviving hopes of an interest rate rise from the Reserve Bank of Australia in the near future.

At the heart of these concerns are still-low inflation, weak wage growth and a relatively high debt burden on households, all of which make raising interest rates either unnecessary or a risk for the economy.

Meanwhile, economic growth is picking up pace elsewhere in the developed world, albeit slowly, which lead the Federal Reserve, Bank of Canada, and Bank of England to all raise interest rates in 2017.

The European Central Bank is also expected begin curtailing its quantitative easing program in the New Year, before winding it down completely at some time in the second half.

Foreign exchange strategists from some of the world’s top banks give their views below, on what the above might mean for the Australian Dollar during the year ahead.

Analyst Views: 

Dennis Tan, FX strategist, Barclays.

“The AUD remains overvalued, and its carry advantage over the USD is likely to continue to narrow, with the US still leading in monetary tightening into H2 2018.”

“Australia’s growth and inflation are likely to remain subdued, given its late-cycle position, the secular adjustment in the commodity sector, and significant internal imbalances.”

“Australia’s growth and inflation are likely to remain subdued, given its late-cycle position, the secular adjustment in the commodity sector, and significant internal imbalances.”

Dr. Vasileios Gkionakis, head of FX strategy research, UniCredit Bank

"Australian fundamentals are solid, but the RBA has already flagged its resistance to joining other central banks in normalising interest rates due to the high level of household debt and weak wage growth."

"The next move will be upward, but the RBA is not in a rush to do that and the strength of the AUD is also seen as slowing economic recovery and inflation."

"The Australian forward curve does not look mispriced by reflecting a 60% chance of one rate hike in the next 12 months and a 90% chance of two moves in the next 24 months."

"As AUD-USD is already trading over 10% above its fair value, we think AUD-USD will reflect USD downside in 2018, rising to 0.82 by end-2018, before retracing towards 0.79 at end-2019."

Hans Redeker, head of FX strategy, Morgan Stanley

"The 'canaries' [AUD,NZD & CAD] have seen years of economic growth outpacing income growth."

"The dominance of US rates in determining global funding costs resulted in local funding costs remaining inappropriately low, given the local needs of these economies, leading to a leverage boom."

"Now, as these economies are running out of balance sheet leverage space, which reduces their growth potential, the US is pushing nominal rates gradually higher, creating further headwinds."

"High real returns in EM and rising US rates mean that the yield advantage offered by these economies relative to G10 counterparts may no longer be sufficient to compensate investors for these growing risks."

End-2018 AUD/USD forecast: 0.67. End-2018 GBP/USD forecast: 1.24. Implied 2018 GBP/AUD forecast: 1.8507. 

Viraj Patel, FX strategist, ING Group

"On a relative scale, politics in Australia could easily be disregarded – although we would view this as being somewhat negligent."

"While the next Federal election isn't scheduled until 2019, the Turnbull government's popularity has lately hit a new low and while this has meant significant delays to any economic reforms and policies, the more immediate risk is whether the Australian PM manages to survive it out until the next election."

"Such fears may keep the AUD defensive in 1Q18, though we would expect any fallout in the currency from a potential spike in domestic political risks to be brief and limited."

"Within the dollar bloc space, selling AUD/CAD is our preferred relative value trade for four reasons: (1) ongoing Canadian economic outperformance; (2) further BoC-RBA policy divergence; (3) reduced sensitivity of CAD to short-term oil price moves; and (4) relative long-term valuations (CAD undervalued vs a slightly overvalue"d AUD)."

End-2018 AUD/USD forecast: 0.81. End-2018 GBP/USD forecast: 1.27. Implied 2018 GBP/AUD forecast: 1.8888. 

Thu Lan Nguyen, FX strategist, Commerzbank

“The Reserve Bank of Australia (RBA) made a strong effort over the past year to prevent a strong appreciation of the AUD against the USD. But next year, it is likely to be somewhat more open to an appreciation of the AUD.”

“On the one hand, the US Federal Reserve will support the USD with further interest rate hikes, which should limit the upside potential in AUD-USD anyway.”

“On the other hand, the Australian economy and inflation are likely to develop in the direction it desires, so that the RBA can also slowly aim to normalize its monetary policy.”

End-2018 AUD/USD forecast: 0.80. End-2018 GBP/USD forecast: 1.53. Implied 2018 GBP/AUD forecast: 1.5875.

Athanasios Vamvakidis, FX strategist, Bank of America Merrill Lynch

"We recommend selling AUD/CAD to position for diverging inflation in G10 economies."

"The nature of the global recovery in 2017 has been a puzzle. At this relatively late stage of the recovery, we would have expected slower growth and higher inflation, particularly in the US where the output gap has closed."

"However, we are observing exactly the opposite, with fast growth and low inflation. The Phillips curve is not just flat in recent years, it is actually positive."

"We do not believe this is sustainable. Moreover, some indicators suggest that US inflation is not that low, with an index including a larger basket of goods suggesting US inflation is high and rising."

"Our Global Fund Manager survey shows a strong consensus for fast growth with low inflation to continue, which is too good to be true, in our view. We see room for surprises that could move markets."

End-2018 AUD/USD forecast: 0.77. End-2018 GBP/USD forecast: 1.40. Implied 2018 GBP/AUD forecast: 1.8181.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.