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HSBC: The Australian dollar can expect further declines


Analysts are predicting a post-crisis low of AUD/USD at 66 cents by the end of the year.

    • Currently at 71c, the Australian dollar is expected to drop to 66c by the end of the year.
    • Declining business conditions, soft consumer spending and a slowing housing market are driving the drop.
    • Rate cuts are expected as a result of these flagging indicators, so the AUD can "act as a shock absorber for the rest of the economy."

The Australian dollar took a beating in 2018 and there's more where that came from, HSBC currency strategist Tom Nash predicts. He points at deteriorating local economic factors, and suggests that reactive approaches from the RBA will leave the Aussie dollar bearing the brunt of the fallout from a potential credit crunch.

"While the risks around [factors outside of Australia] appear to have receded for now, this may be masking the growing risks from the second, which is gathering momentum and deserves more attention," Nash said. "The deceleration in the flow of housing credit has been evident since at least early 2018 but has only recently come into focus due to a flurry of weakness in indicators of domestic demand."

"[These indicators include] a weaker-than-expected Q3 GDP print, the biggest monthly drop in surveyed business conditions since the Global Financial Crisis, a 22.5% year-ended fall in building approvals and monthly retail sales that turned negative in December, confirming two soft quarters of consumer spending," Nash says.

But despite the woes of trouble in last year, sentiment may have taken time to catch up.

"[The RBA] will acknowledge the economy is weaker than when it last met and will signal a change in bias towards an easing," said Stephen Koukoulas, managing director at Market Economics. "It may wait a month or two before acting on that bias."

60% of surveyed experts are now predicting a rate cut from the RBA, marking an extraordinary shift from last December when 78% predicted rising interest rates.

"In the case of a credit squeeze, the labour market tends to be a lagging indicator, suggesting a proactive easing of policy is unlikely," Nash says. "Instead, more of the initial burden may end up falling on the currency to act as a shock absorber for the rest of the economy."

The need to drive domestic growth means AUD won't be winning any beauty contests this year.

Anticipated rate cuts of 25 basis points before the end of the year have already been priced into today's 71c AUD, Nash says, but he believes there's more to come.

"In the ugly contest of G10 FX, we still think the AUD looks unattractive versus the higher carry and reserve currency status of the USD," he says. "Our forecast remains for AUD/USD to trade down to post-crisis lows of 0.6600 by year-end."

Today's exchange rates:

AUD to USD: Historical rate chart


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