Australian Dollar 2009 Forecast

How Did the Australian Dollar Trade in 2008?

Back in July 2008, everyone was talking about how the Australian dollar could reach parity with the US dollar.  At the time, the currency pair was trading at 0.9845 a 20 year high.  However what rises quickly can also fall quickly because when commodity prices peaked in July the Australian dollar came crashing down.  The currency fell close to 40 percent against the US dollar to a 5 year low before finding support above 60 cents.  The move was even more dramatic against the Japanese Yen.  AUD/JPY traded as high as 104 this year before it dropped close to 50 percent to a record low.  Despite the dramatic moves, the Australian dollar’s weakness was not universal. Since the beginning of the year, the currency actually strengthened marginally against the British pound and New Zealand dollars.  Looking ahead, the sharp weakness of the Aussie dollar could help the country recover in 2009.  

Will Australia Avoid Recession?Weak Australian Dollar Will Lead to Upward Revisions for Corporate Earnings

The global economy is slowing but there is a decent chance that we could see Australian corporations report an improvement in earnings.  Since the beginning of the year, the Australian dollar has fallen 25 percent against the US dollar, 35 percent against the Chinese Yuan and 50 percent against the Japanese Yen.  These currency fluctuations are particularly important because Japan, China and the US are the largest export destinations for Australia.  Since a weaker currency reduces the costs for exports, leading Australian companies like Qantas, Billabong and Fosters have revised up their earnings on the expectation that a weak currency will boost foreign demand for their products.  Stronger earnings will help to pull the country out of any recession and hopefully engineer the second half recovery that many economists are looking for.  

Slowdown in China Will HurtInflation to Ease, But Not By Much

The latest consumer prices for Australia are from the third quarter and in Q3, the annualized pace of consume price growth accelerated to 5 percent, the fastest since 2001.  According to the monthly TD Inflation index, price pressures have eased significantly since then.  However with that in mind, the RBA still expects inflation in the 12 months through June to be at 2.5 percent, which is well within the Reserve Bank’s 2 to 3 percent inflation target.

Dramatic Rate Cuts to Come to an End

The Reserve Bank of Australia has been extremely aggressive in 2008, cutting 300bp in just 4 months.  The last rate cut they made was in December when they slashed interest rates by a full percent.  According to the RBA, monetary policy is now “expansionary” which suggests that they are almost done with cutting interest rates.  The central bank has been extremely proactive and their efforts will be vital in helping to restore the Australian economy.  Like many of their international counterparts, Australia has combined monetary with fiscal stimulus.  At most, we expect another 100bp of easing from the RBA next year.  This will probably be in the first half of the year, which is when the economy could fall into recession.  After that, watch out for a quick recovery for Australia in the second half of the year.

Technical Outlook for the AUD/USD  

Although many countries across the globe have fallen into recessions, Australia has avoided one.  The economy has expanded every quarter since 2000 albeit at an increasingly sluggish pace.  In the third quarter of 2008, growth was a paltry 0.1 percent, the weakest in 8 years.  There is a decent chance that growth in the fourth quarter was negative and if so it would put Australia at risk of falling into a recession for the first time in 17 years.  It may be difficult for Australia to avoid a recession, but any recession in the country should be shallow.  Consumer spending has been neutral to positive every month this year thanks to a steady labor market as the unemployment rate has only ticked up marginally from 4.1 to 4.4 percent.  Domestic demand and Chinese demand has made the Australian economy much better equipped to deal with the global slowdown than its peers.   Many economists are looking for 2009 GDP growth to be in excess of 1 percent.  Although this would be the weakest growth since the recession in the 1990s, we are certain that Australians are grateful that their economy is growing at all.   The only significant risk for Australia is a major slowdown in China.  China has been the engine of global growth for the past 10 years and unfortunately for world and Australia in particular, that engine has begun to slow.  For the past few years, China has enjoyed double digit growth rates and in 2008, growth is expected to fall to 9.8 percent and in 2009, growth is expected to fall below 7 percent.  China has not been immune to the global financial and credit crisis and even though the government has deep pockets, the prospect of more weakness in the real estate market and the pain of sharp losses in the stock market could lead to a further slowdown in consumer spending.  Until the global recession is over, many people China could become more conservative with their spending which will undoubtedly have a negative impact on the Australian economy.  

In the first half of 2008, the Australian dollar soared within a whisker of parity with the US dollar.  However as the prices of commodities plunged, so did the AUD/USD.  Having hit a 5 year low of 0.60 in October, the currency pair has been quietly consolidating.  It December, it rose out of the Bollinger Band sell zone.  Prices are also in the process of breaking the 23.6 percent Fibonacci retracement of the 0.9850-0.60 sell-off.  The next level of resistance is at 0.7200, the 20 week SMA and the October / December high.  The turn in AUD/USD remains intact as long as the currency pair remains above 65 cents.