Capital Economics Projects More Than 15% Slash In AUD This Year

Capital Economics Projects More Than 15% Slash In AUD This Year

The market is infused with another bearish forecast by leading independent macro-economic research organization, Capital Economics. The Australian dollar is projected to plunge more than 15 percent in value this year against the US dollar.

Capital Economics anticipates the Aussie currency dipping to USD 0.60 this year, and the trend is expected to continue until next year. This is an updated forecast for the local exchange rate as against the previous projection of USD 0.65 for 2019 and USD 0.70 for 2020.

The Australian dollar is trading around 0.71 USD as on January 24, 2019. It has edged 1.2 percent higher against the greenback so far this year. However, the dip is more than 12 percent over the year when it was trading around and above USD 0.80.

Simona Gambarini, the London-based market economist at Capital Economics, has stated that the exchange rate prediction has been downgraded as they no longer place enough confidence on relative interest rate expectations supporting the local currency.

Last week Capital Economics slashed the Australian interest rate forecast, expecting the Reserve Bank of Australia to reduce its key interest rate from its long maintained 1.5% (since 2016) to 1%. The economic forecaster revised down the rates projection based on 1.3% housing price dip observed for the month of December in 2018. As stated by Marcel Thieliant, Capital Economics’ senior economist for Australia and New Zealand, the downward rate revision is driven by deepening real estate correction.

Capital Economics said the currency forecast is slashed given the country’s leading position as iron and coal exporter, anticipated to be worst performing materials in 2019. It holds a bearish outlook for iron ore at USD 55 a tonne and USD 50 a tonne in 2019 and 2020 respectively. Coal is projected to dip to USD 90 a tonne and USD 80 a tonne in 2019 and 2020 respectively.

The iron ore is trading at the spot price of ~USD 74.58 a tonne. In a recent report released by Morgan Stanley on 6 January 2019, iron ore price is projected to dip to USD 62 a tonne in 2019, USD 58 a tonne in 2020 and USD 60 a tonne in 2021. Citi also released a grim report in November 2018, predicting iron ore price to reach the bottom, averaging US 63 a tonne this year with further dipping to USD 60 a tonne next year. The national government has also hinted at a negative picture of iron ore price anticipating USD 53 a tonne in 2019 and USD 50 a tonne in 2020 via its recently released Energy and Resources Quarterly Report.

The support to Australian currency is further withdrawn by the dismal exports and imports figures reported by China for the month of December 2018. The hinted break in the Chinese supposedly growth model is also expected to have a detrimental impact on the local exchange rate against the greenback. Market analysts are also keeping a closer eye over the direction of possible trade negotiations between the US and China.


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