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Westpac Cuts Australian Dollar Forecasts, Expects Interest Rates to Halve This Year

The struggling Australian dollar will lose a further 5 percent of its value against the US dollar and pound before the year is out, and 3 percent against the euro and New Zealand dollar, Westpac predicted on Friday.

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Westpac, one of Australia’s ‘Big Four’ lenders, has cut its Australian dollar forecasts, it announced on Friday. The decision reflects an increased likelihood of three interest rate cuts this year. Westpac says it now expects the Reserve Bank of Australia to cut its cash rate by a quarter-point in June and August, and possibly again in November — policy moves that would halve Australian rates to a record low of 0.75 percent, from 1.5 percent.

Westpac is now expecting AUD/USD at $0.66 at year-end, nearly 5 percent below Friday’s closing exchange rate of $0.693. The lender’s new forecast mirrors that from GSFM advisor Stephen Miller, who said last week he was targeting “something like the mid-60s.”

It’s been more than a decade since the Aussie has traded at $0.66. As recently as January 2018, the currency bought more than $0.81.

Westpac’s implied 2019 forecasts have AUD/GBP, AUD/EUR and AUD/NZD at £0.515, €0.6 and N$1.02, marking declines from current levels of 5.5, 3.5 and 3.0 percent respectively.

Within its latest weekly report, Westpac cites a number of economic reasons for its pessimism. Among those is an expectation for Australian unemployment to reach 5.4 percent this year, almost certainly a bridge too far for the RBA and a level that would warrant significant policy easing.

It was suggested within the RBA’s May-7 statement that the labour market is of special importance as a policy-determining factor, and the RBA’s own forecast for unemployment to “remain around 5 percent” is already under threat after recent data showed a jump to 5.2 percent.

“Our forecasts for employment, wage growth, economic growth, inflation and conditions in the housing market are consistent with the need for [RBA] policy to ease through the full course of 2019,” Westpac writes.

The Australian lender even goes as far as to suggest “some form of [future] quantitative easing” at interest rate levels below 1 percent.

Quantitative easing would be an extraordinary step for the RBA and its mere suggestion is indicative of Westpac’s inflated bearishness on the Australian economy. This unconventional method is a means of increasing the money supply and encouraging lending, and has been used as a weapon of last resort by central banks throughout Europe, in the US and Japan in the years following the 2007-08 financial crisis. In the absence of other central banks doing the same, QE also offers an ironclad guarantee of broad-based and long-lasting currency weakness.

 

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Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.
 

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