In an FX daily last week we showed that credit growth, business investmentand the ratio of Australian to US interest rates could explain the bulk of thevariation in net FDI and portfolio flows. In this daily we use our publishedhouse forecasts for Australian business investment, credit growth and 10-yearbond yields, along with our published long-term forecasts for US 10-year bondyields to forecast net FDI and inbound portfolio flows (as shown in Figures 1 to6 over the page). We then combine this with our forecasts for the Australiancurrent account deficit to estimate the basic balance through to end-2015. AsFigure 8 shows, the sum of these suggests deterioration in the Australian basicbalance over 2014 and 2015 – despite the significant improvement seen in thecurrent account deficit on account of growth in mining exports. That said, thedeterioration in the basic balance is relatively modest – and would beconsistent with an ~6% decline in the AUD TWI to ~67.5 come end 2015. (Thisis, we should note, a more modest decline than our current forecasts.)
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