Aussie Dollar in 2018: Up or Down?

Forecasting is a tough job.

If you’re wrong, people will never let you forget. And if you’re right, people never remember.

But not to worry. We’re foolish enough to play along yet again…

The Aussie dollar is something we think about a lot.

Did you know that the Aussie dollar is one of the top five most traded currencies in the world? And like many commodity currencies, it can be highly volatile. That’s why it’s popular with traders.

So, where is it likely to go next?

Flip a coin

Uncertainty reigns when it comes to the future of the Aussie dollar. Take this from Bloomberg:

Two of Australia’s largest asset managers are at odds about whether the currency will break below 70 U.S. cents.

The Aussie will slide under that level by mid-2018 as the yield on the nation’s bonds falls below that on U.S. Treasuries, according to Brisbane-based QIC Ltd., which oversees the equivalent of $63 billion.

The Aussie is likely to stay above 70 cents due to China’s robust economy and a tailwind from commodity prices, says AMP Capital Investors Ltd., which manages about $137 billion.

QIC Ltd could be on the money. But we’re backing AMP Capital Investors on this one.

The Aussie dollar remains up for the year, despite it falling by 6% since September. The Reserve Bank of Australia (RBA) is unlikely to raise interest rates soon, given the mixed economic data. That’s put a bit of pressure on the currency.

The RBA’s cash rate stands at 1.5% — an all-time record low.

Indeed, we don’t pay much attention to the Australian economy. It’s boring and doesn’t make an impact on our macro analysis. There are far better things to do with our time, such as following the US Federal Reserve. It has raised interest rates five times since December 2015. That matters for the Australian dollar.

Bloomberg explained yesterday:

“There’s a possibility that the whole yield curve up to the 10-year point will trade below the U.S.,” said Susan Buckley, managing director of global liquid strategies at QIC. “We may well be in a period where the interest-rate differential factor will start to weigh on the currency more than other factors.”

Australia’s two-year premium is now five basis points, down from as much as 510 basis points in February 2008. The extra yield of 10-year bonds has shrunk to 17 basis points from as high as 277 basis points in 2008.

Susan Buckley argues that, given the higher yield on offer, investors will swap from Aussie bonds into US Treasuries because they will be more attractive. That’s likely to put pressure on the Australian dollar.

It sounds good in theory.

Yet, despite the contrary, I’d argue the theory only matters for day traders. The RBA cash rate, whether higher or lower than in the US, makes little difference to the Australian dollar in the medium term. In my view, when it comes to forecasting the Aussie dollar, the only thing worth following is commodity prices. That’s because Australia is a resource-driven economy. 

Aussie dollar outlook 2018

Take a look at the monthly chart of the AUD/USD exchange rate below:

AUD/USD exchange rate 20-12-17


Source: Tradingview.com; Gold Stock Trader
[Click to enlarge]

During the Global Financial Crisis of 2008/09, commodity prices crashed. The Aussie dollar nosedived to 55 cents when that happened. So, if the Aussie dollar was going to crash again, you’d expect commodity prices to go down the drain again. At the moment, though, most commodities look strong, and so does the Aussie dollar.

CNBC wrote last Tuesday:

Goldman Sachs is expecting the commodities sector to generate returns of almost 10 percent next year, more than other assets over the long run.

Jeffrey Currie, global head of commodities research at the U.S. bank, said “a positive carry in key commodity markets and already strong global demand growth across the commodity complex reinforces the case for owning commodities. And hence we maintain our 12-month overweight recommendation, now with a forecasted return of almost 10 percent.”

Jeffrey Gundlach — the CEO of DoubleLine — who manages more than US$100 billion, agrees. CNBC reported on 13 December:

“I think investors should add commodities to their portfolios,” Gundlach said, pointing to an inverse relationship between the total return of the S&P 500 and the S&P Goldman Sachs Commodity Index.

“You go into these massive cycles,” he said. “The repetition of this is almost eerie. And so if you look at that chart the value in commodities is, historically, exactly where you want it to be a buy.”

Gundlach noted that commodities are just as cheap relative to stocks as they were at turning points in previous cycles that began in the 1970s and 1990s. The S&P Goldman Sachs Commodity Index is up 5 percent this year, versus the S&P 500’s 19 percent gain.’

Indeed, commodities are looking strong. That’s why, as you can see by the blue lines on the chart below, the Aussie dollar remains in an uptrend channel.

AUD/USD exchange rate 20-12-17


Source: Tradingview.com; Gold Stock Trader
[Click to enlarge]

First level support stands around 75 US cents, as shown by the lower blue line. If the Aussie dollar closes below that level on 31 December, it suggests the currency is weaker than many expect.

Major support exists at 70.5 US cents, as shown by the pink line. That should stand around 71 US cents by mid-next-year. That level needs to break to suggest an Aussie dollar crash is on the horizon.

In other words, unless commodity prices fall off a cliff, which doesn’t look likely right now, there’s little chance of the Aussie dollar falling below 70 cents anytime soon in my view.

Regards,

Jason Stevenson,
Editor, Gold Stock Trader


Jason Stevenson is Markets & Money’s resource analyst. He shares over a decade’s worth of investing and trading experience across resource stocks and commodity futures and options. He originally studied accounting and finance at Curtin University, where he was awarded a first-class honours degree. His professional background stems across high-net-worth, top tier accounting (corporate finance, tax and auditing), and sell-side equities research. Before joining the team at Markets and Money, Jason worked at boutique firms which advised fund managers and high-net-worth clients on where to invest. Whether it’s gold, crude oil, copper or an obscure metal like vanadium, you can rely on an in-depth analysis in Markets and Money. Jason also brings you extensive macro, political and geopolitical analysis from around the world. He leaves no stone unturned when it comes to telling the truth. Jason is also the lead analyst of Gold Stock Trader, a premium service for investors serious about precious metal stocks. Websites and financial e-letters Jason writes for:


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