Australian Dollar / USD Forecast: NAB Strike Somber Tone

NAB forecasts the AUD to fall to 0.7000 against the USD by the end of 2015, and to 0.6800 in the first quarter of 2016.

These forecasts are down from 0.7200 and 0.7100, respectively.

The recent devaluation of the Chinese Yuan has put a veritable question mark on China’s economy.

Though, certainly not in a recession, its economic growth has definitely slowed to warrant such an unexpected reaction.

With this uncertainty in display, the Australian share market fell steeply.

For a while now, China’s growth has been in question.

There have been other indicators that the stable picture painted by the National Bureau of Statistics of China may not be overly reliable; that the Chinese economy was undeniably weakened.

Given the close links between the Australian and Chinese economy, vis-à-vis the exposure of the Australian economy to falling prices and demand for its raw materials, this weakness will only reverberate down to the AUD, further pressuring the currency.

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In its wake, the Chinese Yuan devaluation has left the Asian FX weaker. As a commodity currency, this will weigh on the AUD.

And as China overcomes its economic challenges, with a heavy emphasis on its unsustainable infrastructure investments, it stands to reason the country’s demand for raw materials will ease.

The recent trend towards lower commodities prices is expected to continue.

The iron ore and coal sectors are anticipated to be the most affected casualties of this downturn.

Concurrently, the LNG exports which have seen substantial increases are also expected to decline, according to NAB.

And despite any future volume increases, the expected prices for Australian commodities simply won’t be enough to sure up currency valuations.

Unsurprisingly, the US Federal Reserve has left interest rates unchanged but with an open indow for tightening in September; another rationale for the NAB downgraded forecast.

The NAB firmly believes the market is not sufficiently pricing the risk of a September US rate increase.

Already, present gains in the US dollar against other major currencies have pushed the AUD lower. However, upon the release of the Federal Reserve July meeting minutes, the horizon will become a whole lot clearer for the AUD.

If US rates are scheduled to rise, or there is any indication of this, the AUD will fall. Although there are sceptics of the Federal Reserve September hikes, the NAB foresees a full hike that will further shrink Australia’s yield advantage.

The National Australia Bank is clear: there are undeniable risks to the decline of the Australian Dollar. China’s economic challenges will not go away anytime soon; heavy investments in infrastructure and real estate, without adequate demand, have taken its toll.

To stymie this economic bleed, China seems to be prepared to take full and impervious advantage of their monetary policy.

Additionally, China’s slowed growth has resulted in a weakened demand for Australia’s raw materials; a backbone to the AUD. Meanwhile, the US’ looming rate hikes seems to be an assured certainty. For these reasons, the AUD will remain  squeezed under these external market forces for the foreseeable future.

"Aussie buyers should consider locking in profits as minutes from Australia’s last central bank meeting refrained from calling for further falls in the Aussie, a departure from recent months, suggesting the currency may be near a bottom," says Joe Manimbo, Senior Market Analyst at Western Union.