Australian Dollar 2018

I want the AUD to strengthen so it’s cheaper to buy US shares which to me have more potential than ASX shares. I’m a happy Apple shareholder.

 

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In the case of Catalunya, it´s more like getting a divorce from an abusive violent partner.

 

This time parity will be achieved not through AUD strength, but with gradual USD decline (or very sudden decline if/when the petrodollar system is dismantled).

 

.... yet US economy booming...
as always review in 6 months time, this is a long thread

 

That makes sense, that everything is priced based on US treasuries, the ultimate “risk-free” assets.

 

China is currently slowing down, 2017 was good year as first 3 quarters they had to maintain good numbers for their party congress. Look at the more immediate PMI numbers.

Also bond rates for us 10yr treasuries have suddenly jumped to 2.64% and our 10yr is at 2.86%.

China is on the path to slowdown this year I reckon. We should be seeing 75c again pretty soon.

2018 will either be flat or we will have another gfc of sorts brewing.

 

Not according to SBS World News the other night and also backed up by Asia Times. Few other sources are pointing to slight growth in China this year also.

China records improved GDP growth in 2017

China exceed expected target of 6.5% but recorded 6.9%. Also total trade of 27.79 Trillion Yuan which reversed 2 years of previous down turn.

Let see. I'm on the bullish side for the AUD. Looks like your on the bearish side.

 

I think the RBA has a conundrum.... they want the cash rate higher but to get it there risks pushing the dollar even higher, and damaging the economic transition to services that Australia is moving through now... how do they lift the cash rate 4,5,6 times to "normalise" it without pushing the AUD to the 90's or parity ? Its already hovering at the 80-81 cent mark....

This is why I'm not convinced there is a clear road for the RBA to lift the cash rate very much (or possibly at all) for quite some time yet... and that's why I also think there's a better than reasonable chance the P&I cliff that's approaching many borrowers will be far less of a problem than it otherwise might have been. That's not to say it wont hurt some borrowers, or that there wont be a 25 or 50bpts cash rate increase at some point, but I think its effects will be far less problematic than if the cash rate was 3% - 3.5% rather than 1.5% - 2% when all those IO loans start rolling out in 2019 and 2020...

I also think the APRA stuff has done a lot of the work for the RBA in putting a lid on household debt ... so I'm not convinced they will be feeling that cash rate increases need to be as many or as soon, as otherwise might have been the case...

As I said...I think the RBA has a conundrum....

 

US 10yr now spiked to 2.7
Au 10yr only 2.85
Reversal of carry trade coming soon if this persists.

Soon RBA will have no choice but to raise rates just as massive capital outflows happen.

Back to 70c to USD looks like a likely scenario now.

 

I don't get it. The interest rates will rise and that should raise the AUD too.

 

Increasing AUD has the effect of slowing the Aussie economy without IR rises. Hence RBA relying on APRA to slow home lending & growth which appears to have been successful.

According to bank trade desks, they believe approx. 80% of the Aussie growth has been due to commodity prices and the strengthening world economy. So AUD less determined by Aussie IR's, instead it is commodity prices.

Interesting that although the market has 'almost' priced in a 25bpts rise in by the end of 2018, Westpac/BOM/St George is predicting no change in 2018 (although next move will be up) and that AUD/USD will be between 82 and 84 at end of 2018.

Interesting to see how close the forecasts are with very strong employment growth but yet to see it convert to wage growth and inflation.

Recruiting companies also support that with reports that the market is strong (In Melb anyway) and that good candidates are being snapped up quickly.

My prediction FWIW is that RBA will hold until they see the wage growth taking place, suspect maybe last 1/4 2018 or first 1/4 2019.

 

I think Kanga's point was that the fate of Aus interest rates and the AUD doesn't primarily depend on domestic economic factors but international finance. IR to go up to counter capital flight from Oz, the same capital flight that will bring the AUD back to earth (along with falling commodity prices).

 

My point is that RBA mandate is to look after domestic factors & economy rather than international capital flows & ER.
International finance & ER has an impact - undoubtedly yes as it impacts Aus economy, the primary factor - no.
If Aus economy is tanking on domestic factors v opposing international impacts (whatever scenario that may be at the time) I know what I’d be betting the RBA will be acting upon.

 

Not if the US is raising more aggressively.

My take is, that the RBA is reticent to raise rates due to households high debt burden. It will slow spending and hurt household's at a time when inflation is already trending below band.

 

Yes you get my drift.

The AUD is at its core a commodity currency(to be more specific iron ore/coal). The recent strength is mainly due to recovery in commodity prices on the back of oil prices. iron ore has gone up from 60 to $70+ since Nov 2017 till now. So AUD is mainly affected by commodity pricing. But it is also affected somewhat by gov bond yields and things like local economy.

The other thing that has made AUD attractive has been the higher gov. 10yr yields. Currently giving IR of 2.86%, it is stil above US 2.71% . However the gap is getting smaller. Our gov bonds have usually been yielding >25 points more than US ones, so capital kept flowing in. Once US yields go past ours, capital goes out and its bye bye to our financial system.

RBA will have to increase their rates in such a case, as capital flight out can be very quick and devastating to the financial system. Last i read about 50% of our banks funding comes from overseas. So if capital moves out, local funding costs for our banks would skyrocket overnight. Liquidity would become tight and you would get towards a GFC kind of scenario. This would then tank the AUD. This is a scenario in which the typical IR rises=rising currency does not hold true.

 

well if US yields go past ours, AUD will likely go down which will be good for us being more of an exporter. However what that means is that a lot of capital inflows based on the carry trade will reverse, which in the short term can suck the life out of the economy. Capital outflows will also cause a spike in lending rates independent of what RBA sets. And rising rates, once past a certain tipping point (probably a sudden increase 1% within a year), will start the cascade of deleveraging in the property/banking sectors which have been one of the biggest drivers of our economy. If these two things happen(massive capital outflows and property bust) , it will be definitely devastating, especially when RBA doesnt have much left in its arsenal and we dont have the "booming commodities support" from China anymore, as we did the past 2 decades.

 

US10YR is now ~2.79% vs AU10yr ~2.83% which is really the smallest gap in recent years but the AUD is still holding strong!?!?!?

Will we be getting a sudden sell-off in the AUD this month? Pretty sure the big 4 are gonna have to start raising rates in response this month!

 

As of last night the US 10yr is now higher at 2.84% to the aus10yr.

AUD is has now started on a downward trajectory 79c.now