Nostradamus Couldn’t Predict the Fate of the Aussie Dollar

I wondered to myself this morning whether Nostradamus ever dabbled in currency trading. Probably not. But had he, it’s likely he wouldn’t have had much success. He may have prophesised the death of Henry II and even the Great Fire of London. But Nostradamus himself could tell you the value of the Aussie dollar in 2016.

When currency analysts discuss the future of the Aussie dollar, they’re almost always indulging in guesswork. This isn’t all that different from what Nostradamus did for a living. But at least he wasn’t masquerading as an analyst. You knew what you were getting.

It’s high time we started treating currency analysts as astrologers in the Nostradamus mould.

There’s too stark a difference of opinion splitting analysts down the line when it comes to the dollar. A Bloomberg survey of currency experts showed most predict the dollar at anywhere between $0.62 and $0.82 in 2016. You could ask a room of children to pick out a number between 50 and 100. And you’d probably get a similar response to that.

Frankly, this variance is both confusing and misleading for traders and consumers alike. All we know for certain is that the Australian dollar is trading at just under US$0.71 today. Where it goes next is anyone’s guess. But it doesn’t stop analysts from trying their hand at predicting trends.

Opinion should be encouraged. And some analysts have a better understanding than others. But what’s frustrating is the sheer lack of uniformity when it comes to the dollar’s future. There’s just too much leeway with these predictions, which typically suggests uncertainty. At worst, it’s a sign of the sheer cluelessness engulfing currency markets.

Ultimately, the people that are paid to know are no wiser than you or I. Take today’s news for example:

Analysts at Macro Currency Group forecast the Aussie dollar falling another 10% in 2016. It predicts a floor of US$0.58 for the Aussie.

But investment management firm Loomis Sayles reckons that commodity currencies have priced in most of the bad news already. Because of this, there’s only upward momentum facing the dollar.

If you believe one analyst, you’re either going to make the right call, or a very wrong one. Uncertainty and risk are hallmarks of everyday trading, without question. But it doesn’t have to carry as much doubt as currency analysts wild ranging predictions suggests.

So who can you trust?

Understanding what moves the Aussie dollar

As always, it’s best to step away from the numbers and look at the situation with perspective. Think about what truly impacts the movements in currency markets. And then come to your own conclusion. Because often these predictions are made with elementary analysis — based on a flawed understanding of events. Once someone believes they’ve sussed out an issue affecting currency movements, it’ll frame their entire picture going forward.

Take for example the issue of declining commodity prices.

China’s economic slowdown weighs heavily on the Aussie dollar. As a commodity currency, the dollar trends in large depending on demand for Australian resources. Not just in China but around the world too. So when demand for commodities slackens, the Aussie dollar weakens. It’s a simple relationship. And it makes any stance on the future of commodities an important factor in predicting the fate of the dollar.

The other major consideration for the dollar is the interest rate. Or rather, interest rates. Australian currency traders are not only keeping an eye on what the RBA does. They’re also watching the US Fed closely too. If the Fed lifts rates, the US dollar strengthens. And that moves other major currencies in the opposite direction. Same deal with the RBA. Only it’s contemplating rate cuts, not hikes. Should rates fall again, the Aussie dollar would weaken in turn.

These two factors play key roles in pushing the Aussie dollar up or down. Let’s leave China and global growth aside, focusing instead on the interest rate issue.

If you could predict when these rate movements are likely to take place, you’d be flying. Right now, currency markets have no idea when US rates will rise. And they seem just as clueless when it comes to the RBA’s intentions.

If we followed what these analysts told us, we’d already be well into our second or third rate hike in the US. But we’re not. There’s been no movement. And there’s not likely to be anytime soon. That’s guesswork on my part too, and by no means am I more knowledgeable on currencies than the analysts. But my forecast is supported by an understanding of circumstance. Something which many analysts can’t seem to grasp.

I wouldn’t tell you the Aussie dollar will end up here or there in next year. But what I can tell you is that the US economy isn’t mending. There’s evidence to support it. Proof that’s snowballed over the course of this year…everything from poor jobs growth, to slowing consumer demand.

And yet people still buy the argument about ‘looming’ rate hikes in December. Even after the Fed successfully conned the markets of the same thing back in September and October.

No one seems to be learning the lessons. These cryptic central bankers don’t want you to know what their next move is. They have no intention of revealing their monetary policy. And yet we take them and their Fed-boosters in the markets at face value.

Remember that when you hear people talk up a December US rate hike and see local traders rub their hands at the prospect of a weaker Aussie dollar.

No one really knows what the Fed’s next play is. And while I make no claim of knowing either, it goes back to what I said before. Look at the current situation, and analyse the path that makes most sense. When you do, you might see that little about the US economy screams ‘hike’ at present.

As for Australia, the RBA gives the Fed a run for its money when it comes to doublespeak. On the one hand, the RBA keeps telling us the economy is recovering. And it follows that up by saying that there is room to lower rates again. Which is it? If the economy is on the mend, then there’s no reason to lower…

But again, don’t listen to what it’s saying. Look at the Aussie economy in isolation. Then ask yourself what makes sense? As a bear on the economy, I see only one outcome. With no US rate hike coming, and with global growth slowing, a rate cut is almost certain. The Big Four banks have even rolled out the red carpet for the RBA. By lifting mortgage rates, they’ve implied the RBA is on the verge of cutting.

Dig beneath the surface of the macroeconomic environment. Stop focusing on the numbers alone, and the credibility these ‘analysts’ convey. You’ll end up with a better understanding of where the Aussie dollar is heading. And you’ll cut through the crapshoot involved in currency forecasting.

Mat Spasic,

Contributor, Markets and Money

PS: According to Markets and Money’s Phillip J. Anderson, interest rates could remain low for a long time to come.

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Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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