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Australian Dollar Worth 5 Percent More by Mid-2019 (CIBC)

In a note to clients this week, CIBC predicted a rise in the Australian dollar to $0.76 by mid-2019. The forecast represents appreciation of 5 percent from Monday afternoon’s quote of $0.724 and will be driven by higher Australian wages, the bank says.

Posted Nov 26, 2018

Strength in the Australian dollar throughout 2019 will be driven by higher wages and sustained because of the low starting position of the AUD/USD exchange rate, CIBC have said.

With ample room to the upside—AUD/USD was quoted on Monday 11 percent below 2018 highs, at $0.7243—the Canadian financial services group predict that the Aussie buys $0.76 by the middle of next year, with potential for $0.77 or higher in the third quarter.

“Risks to [Australian] wages are higher given that capacity utilization has recovered to levels that have justified rate hikes in the past. This should feed into consumer prices, especially the trimmed mean gauge,” CIBC said.

CIBC analysts imply that higher wages will alter expectations for interest rate hikes by the RBA, the first of which is currently expected in late 2019, per derivatives pricing. It is the expectation of higher interest rates that will drive inflows of interest-chasing capital into Australia, which consequently will drive up the value of the nation’s currency.

There is no doubt that a pick-up in wage growth would be advantageous for the Australian economy; the head of the RBA has said as much several times this year.

“It is clear that the slow growth in wages is affecting our economy,” RBA Governor Philip Lowe said during a speech on wages and prosperity in June. Wage growth at the time of Lowe’s speech stood at 2.1 percent but has since risen to a still-substandard 2.3 percent.

The Governor added that wage growth near current levels made it “unlikely that the rate of inflation would average around the midpoint of the inflation target in the period ahead” and that a return “to a world where wage increases started with a 3 rather than a 2 is . . . desirable.”

Against the US dollar, euro, pound and yen, the Australian dollar currently trades several percent higher than its October lows but in all cases it remains a long way down on highs from recent years. This, CIBC suggests, is now in its favour.

“With [AUD] bouncing back from year-to-date lows and with speculative shorts beginning to be pared back, the balance of risk [for AUD] has begun to shift to the upside.”

In concluding remarks, CIBC researchers argued that risks to the Australian dollar, which above all include those related to US-China trade, are “largely priced in.”

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