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Researchers Make Sweeping Cuts to Australian Dollar Forecasts

Within recent days, a host of experts have cut forecasts for the Australian dollar, indicating a new wave of pessimism on what is already the past year's worst-performing major currency.

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The Australian dollar lost value against all major currencies on Thursday following a decision by National Australia Bank to raise mortgage rates for owner-occupiers and investors with variable home loans. Similar hikes were introduced by other large Australian banks in 2018, including Commonwealth Bank, Westpac and ANZ, and such hikes remove much of the incentive the RBA once had to raise its currency-supporting cash rate.

Such is the gloom surrounding the Australian economy that Capital Economics announced on Thursday it had revised its AUD/USD forecast for 2019 year-end from an already-disappointing US65¢ to only US60¢—15 percent lower than the current quote of US70.9¢ and a whopping 26 percent lower than 2018’s best rate of US81.35¢.

AUD to USD - 1 Week chart - Latest
AUD/USD - 1 Week Chart - Latest

Capital Economics also predicts that the RBA will be forced to cut its cash rate by 50 basis points to a record low of 1.0 percent. Chief among its reasons for the prediction are increased risks for the Australian housing market and general pessimism on China, a senior economist at the group told the Australian Financial Review.

Australian house prices fell nearly 5 percent in 2018 and are expected to lose a similar amount this year. Recent data from Core Logic showed prices falling at the fastest quarterly rate in more than a decade.

It is the record level of household indebtedness associated with overinflated home prices that troubles experts at Radobank, which predicts AUD/USD at US68¢ before the year is out.

Like Capital Economics, Radobank sees the RBA cutting interest rates.

“You’re in a doom loop. Now that the Federal Reserve is finally on hold, the RBA can finally talk about cutting again, and they will,” Michael Every, a senior economist at Radobank, told Bloomberg on Wednesday.

To the aforementioned narrative can be added last week’s stark warning from a senior researcher at BNP Paribas Asset Management, who said that the Australian dollar will get “absolutely crucified” and might lose as much as 30 percent of its value.

AUD to GBP - 1 Week chart - Latest
AUD/GBP - 1 Week Chart - Latest

Not convinced, though, are the team at National Australia Bank.

“What we can say is that AUD/USD has traded [in January] convincingly below US70¢ for the third time in 5 years and each time failed to spend very much time there . . . [and] this leaves us as comfortable as we can be that AUD/USD will remain for the most part a US70-75¢ currency for many months to come,” NAB wrote on Wednesday.

Although the Aussie is losing value across the board, it continues to be hardest hit against the resurgent British pound. AUD/GBP slid on Thursday to a 3-month low of 54.2p—nearly 5 percent lower than rates a fortnight ago.

NAB had words for AUD/GBP watchers this week: it said that the likelihood of a disorderly Brexit had, in its opinion, diminished greatly, and as a result an exchange rate of 50p—a rate not seen since 2016—should be expected before the end of June.

 

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