Canadian, New Zealand and Australian Dollar Forecasts: C.B.A See Woes Ending in 2016
Exchange rate forecasts for 2016 from the Commonwealth Bank of Australia (CBA) predict the Aussie will hit a low of 0.65 against USD before gradually recovering. Recoveries for the Canadian and New Zealand dollars are also seen.
CBA continue to see weakness in the Aussie in the near-term, as a combination of falling commodity prices and China slow-down hit the export economy, despite some offsetting success coming from a growing domestic services sector, notes their latest report:
“Global factors continue to dominate and generate a net medium-term depreciation in AUD/USD.
“Those global factors are sub-trend Asian and world GDP growth, a firmer USD, and lower commodity prices putting downward pressure on Australia’s terms of trade.”
Their near-term forecasts posit 0.65 to the USD by March 2016.
This would constitute a bottom for the pair which would then see a rise to 0.6700 in Jun, 0.6900 in Sep and 0.7000 in December.
The GBP/AUD pair, meanwhile, is expected to rise to 2.2000 in March before steadily declining to 2.1571in December, passing through 2.1493 and 2.1304 in June and September respectively.
It is noted that efforts to diversify Australian trade to non-Chinese destinations has been quite successful and looks set to offset some of the China-slowdown damage, however, support will not bear fruit until later in the year.
In terms of the shrinking mining sector which has been so badly hit by the recent commodity price slump, the bank has estimated that the investment reduction into the sector is now almost “70% complete”, whilst the cuts to employment it estimates at “56% complete.”
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.014▼ -0.11%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9455 - 1.9536 |
**Independent Specialist | 1.9858 - 1.9939 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Pound Sterling - November Interest Rate Rise
The CBA has revised back its expected date for when the BOE first raises interest rates to November 2016, joining an increasing number of major banks who see the central bank delaying when it makes its first rate hike, until the autumn.
“We have revised down our GBP/USD forecast profile. We now expect the first Bank of England (BoE) rate hike in November 2016. This is somewhat later than our previous assessment that the tightening cycle will begin in May 2016.”
The bank’s reasons include, “slower U.K growth momentum, combined with downward revisions to historical U.K. GDP growth,” and it sees, “slower absorption of slack in the U.K. economy overlayed with the subdued UK wage growth, global disinflationary pressures, and pass-through from past GBP strength,” as reasons to expect, “U.K. inflation will take longer to accelerate back up towards the BoE’s 2%pa target.”
The bank further sees Brexit fears as weighing on the outlook for sterling:
“The EU referendum is set to be held by the end of 2017, but reports suggest it could occur in Q2/Q3 2016.
“Given the political uncertainty over the outcome of the referendum, participants are pricing- in a greater risk premium into GBP-denominated assets, and marking the exchange rate lower.
“This was the same pattern observed in the lead-up to the 2014 Scottish referendum and 2015 U.K. general election.”
The Commonwealth Bank forecasts GBP/USD at 1.44 in June 2016 and to end the year higher at 1.5400.
Dollar – Peaking Midyear
CBA forecast the dollar to rise in the first half of the year before plateauing and, “losing a modest amount of strength in the second part of the year.”
They expect the Fed to make three rate hikes in 2016, “in March, June and December.”
The report suggests:
“USD support is being generated by lower commodity prices lifting the U.S. terms of trade; the exact opposite of what is occurring in Australia’s economy. It is difficult to get too bearish the USD when there are many factors generating USD support.”
Eventually continued dollar appreciation will reduce the dollar’s advantages, by, for example, reducing export competitiveness, which is expected to reduce GDP by 0.7% in the next 12-months.
This counter-balancing effect will be most pronounced mid-year when the currency could stall as the outlook for the Fed becomes markedly less hawkish.
The currencies most likely to weaken versus the greenback are those linked to commodities and emerging markets:
“The currencies most vulnerable to a further depreciation against the USD in 2016 are the commodity exporters, with large current account deficits increased their share of USD debt over recent years.”
Euro – Recovery Continues
CBA analysts expect the single currency to remain fairly well bid in 2016 as advantageous terms of trade and a budding recovery in the region starts to become more defined:
“The improving trend in the Eurozone economy, combined with the Eurozone’s current account surplus (a large and influential 3% of GDP), should afford the EUR with support.”
Even the dollar is expected to depreciate against the euro as the year progresses, falling to 1.1200 by year end.
However, the recovery in the euro will remain “modest and gradual,” and the risk of a further devaluation in oil, putting pressure on interest rate expectations is also quite high.
The bank sees a policy response from the ECB as quite probable given the inflation drag from subdued commodity prices:
“Moreover, given the renewed falls in oil prices, low core Eurozone inflation, and the risks of a de-anchoring in longer-term Eurozone inflation expectations, another incremental ECB policy adjustment is looked for in H1 2016.
“Such a policy event will generate a spike down in EUR/USD.”
New-Zealand Dollar – Underlying Strength
Commonwealth Bank revise up their forecasts for the Kiwi, based on:
“The main reasons for a higher NZD/USD are higher New Zealand swap rates and stronger-than-expected demand for New Zealand assets, which is generating support for the NZD.”
They expect NZD/USD to reach 0.63 by June and 0.65 by the end of 2016.
Chinese Yuan – Pboc Support
The CBA expect the Chinese Yuan to be supported by Pboc policy.
The central bank successfully defended its offshore rate which it is expected to converge with its onshore rate.
“The lowering of our near-term USD/CNH forecast (stronger Chinese currency) reflects the likelihood of the PBoC persistently achieving their on-and-offshore convergence policy goal, rather than a change to our fundamental macroeconomic view on China’s economy.”
CBA expects the USD/CNY to fall to 6.5 in June and 6.3 in December.
The Canadian Dollar – peak at 1.48, woes to end
As for the loonie – the CBA actually expect the relentless down-trend in the currency to end in 2016 and for it to recover:
“We have lifted our USD/CAD forecasts. We now expect USD/CAD to peak at 1.4800 in Q1 2016 (previously 1.4000) and to stayhigher for longer thereafter.”
The currency is forecast to rise as a result of an outlook of above-trend GDP growth.
CBA acknowledges that the risk, however, is that the established down-trend in oil continues and this weighs on growth:
“The reason Canadian GDP growth may be weaker than anticipated is that the fundamental downtrend in crude oil prices remains intact and unlikely to change in H1 2016.
“Declining crude oil prices will lead to further contraction in Canadian business investment (energy accounts for over 23% of business capital expenditure) and lower Canada’s terms of trade (chart 19).
"This in turn, reduces aggregate income and wealth in Canada’s economy, which will ultimately undermine Canadian household spending and real GDP growth.”
CBA expect the USD/CAD pair to fall to 1.45 in June and 1.39 at the end of the year.
