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Australian Markets Weekly FX forecast update

FX forecast update –  AUD/USD outlook revised up

• Last week we revised our FX forecasts. Our forecasts for all G10 currencies have been revised to reflect our increased conviction that the recent weakening in the USD is ’for real’ and has a fair way to play out over the coming couple of years at least.
• Revisions also extend to the growth/commodity-price/risk sensitive AUD and NZD, which we now forecast to reach 0.80 and 0.74 respectively in 2022 before hitting cyclical peaks.

The week ahead

AU/NZ. AU: The RBA meets on Tuesday, where it is almost certain the bank will keep monetary policy and its policy guidance unchanged. The post-meeting statement may provide some detail on the bank’s revised economic forecasts, to be formally released on Friday in its Statement on Monetary Policy. The bank is likely to upgrade its near-term outlook on the back of better data, but still expect a slow recovery in activity, unemployment and inflation. Retail sales data on Tuesday should show real retail spending fell in Q2 by 1.4% q/q, taking ¼ pp from Q2 GDP. NZ: For Wednesday’s Q2 labour market reports, we forecast 5.9% for the unemployment rate (from 4.2% in Q1), a 2.1% quarterly decrease in employment, and a drop in the participation rate to 69.8%, from in 70.4%.

Global. CH: the services Caixin PMI may hint at a broadening in the recovery after the industrial-led rebound. US: All eyes remain on whether a new fiscal package can be agreed to, particularly the extension of the $600 a week unemployment benefit supplement. July non-farm payrolls are due Friday where 1.5m jobs are expected to be created (but where the range of estimates is a wide -1m to +3.3mn). EU: As COVID-19 shows signs of reappearing in selected European cities, markets will keep a wary eye on whether these outbreaks can be kept under control. UK: The BoE meets on Thursday, but no changes are expected to rates or QE.

Chart of the week

AUD/USD medium-term model in line with spot.

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Our use of fair value models for AUD and NZD (or other currencies) show the relationship between the level of AUD and NZD and important variables (e.g. interest rates, commodity prices, risk sentiment) that historically have shown to have significant influence on the behaviour of the currency. They are designed to aid our understanding of the impact each of these variables have in driving changes in the currency. Significant divergence between the actual and the model value may indicate that factors other than the model variables are currently influencing the value of the currency. You should consider the actual situation before making any decision about a product including whether to acquire or continue to hold it.