We have revised lower our near-term AUD/USD and NZD/USD forecasts given continued US fiscal cliff uncertainty. A short-term US fiscal cliff compromise in Q1 13 is likely to see AUD/USD and NZD/USD appreciate as risk sentiment is buoyed. However, stretched valuations relative to both, history and other key cyclical currencies, such as the ZAR and KRW, and reduced interest rate differentials suggest that the scope for further AUD/USD and NZD/USD appreciation from current levels is likely to be limited in H2 13 (Figure 1).
Recent movements in commodity prices and domestic economic data in both Australia and New Zealand suggest downside risks to AUD/USD and NZD/USD. In Australia, the mining investment cycle is slowing more quickly than expected and Australian firms recently lowered their investment intentions for the year to June 2013. While the Australian labour market appears relatively robust, private sector credit growth is historically weak and business confidence remains subdued. In New Zealand, unemployment increased sharply in Q3 and business and consumer confidence remain restrained despite signs of improvement in the housing market.
Australia and New Zealand commodity prices are currently around 10% below the February 2012 peak, and trading-partner growth is unlikely to increase rapidly through 2013. The sharp drop in Chinese export growth in November is consistent with our view that external uncertainty remains the biggest downside risk to Chinese economic growth, and we continue to forecast a moderate, rather than sharp, rebound in economic activity. Australia-US interest rate differentials have narrowed around 40bp since early August, due in part to Reserve Bank of Australia (RBA) rate cuts, and do not justify current AUD/USD level, in our view. In contrast, NZ-US interest rate differentials have increased slightly over this period as the Reserve Bank of New Zealand (RBNZ) has left policy unchanged and indicated future policy easing is unlikely (Figure 2).
A short-term US fiscal cliff compromise in Q1 13 is likely to see AUD/USD and NZD/USD appreciate to 1.05 and 0.83, respectively, as risk sentiment is buoyed. However, stretched valuations relative to both history and other key cyclical currencies, such as the ZAR and KRW, and reduced interest rate differentials suggest that the scope for further AUD/USD and NZD/USD appreciation from current levels is likely to be limited in H2 13.
In addition, we forecast a widening in both countries’ current account deficits, driven by deteriorating trade balances through 2013. The NZD is likely to be better supported as the Christchurch rebuild adds to GDP growth and as structural demand from China for soft commodities, which make up a larger proportion of New Zealand’s merchandise exports, increases. For the AUD, while we forecast weaker GDP growth in 2013 relative to 2012 (Figure 3), we do not expect significant depreciation given its continued status as a safe haven. We think there is scope for further foreign ownership of highly rated Australian assets to increase, including semi-government bonds, where the proportion of foreign ownership is around 40% (Figure 4). As such, we forecast AUD/USD will reach 0.98 and NZD/USD 0.80 in one year, from 1.02 and 0.81, respectively, previously.
Barclays Capital