This year has seen the Australian dollar trade in a fairly steady downtrend. In August, the AUD dipped to a ten-year low of 0.6671 USD, around 8.5% lower than the 52-week high of 0.7296 recorded back in late-January. With the exchange rate slowly inching higher across the last few months, it is an opportune time to focus on the currency outlook for 2020.
Weakness in the Australian dollar throughout 2019 has been shaped by dovish RBA policy - three interest rate cuts - and a stalling Australian economy. In addition, global trade disputes have played a defining role, with the AUD traded as a proxy to the economy of our major trading partner, China.
Heading into 2020, these key themes are again likely to weigh on the Australian dollar, while political influence could also play a role given next year’s US presidential election.
Amid these risks, we are calling for a target of 0.65 USD by the end of next year.
Stalling economic growth
The Australian economy is yet to show any signs of expanding at the desired rate of the Reserve Bank of Australia. GDP growth has hit decade lows, inflation is lacklustre, and unemployment is still above target levels. Even the positive trade data from the second and third quarters is already starting to fade, with October’s trade balance dropping to its lowest level in 10 months.
Furthermore, personal income tax cuts are not having the effect that the government had anticipated. This means we may have to wait until next year’s Federal Budget at the earliest before any additional stimulatory policies are introduced, or for any amendments to optimise the income tax cut program currently staged out until July 2022.
With the cooling state of the economy, even if further stimulatory measures are implemented next year, it is likely that it would be some time before these manifest through an economic upturn. This ultimately supports further monetary easing.
Dovish central bank policy
Although interest rates have dropped several times this year, it is looking increasingly likely that the RBA may continue its easing bias into 2020. The prospect of one rate cut is very high, while a second one by the middle of next year is also a probable outcome at this stage. These efforts would help the RBA restrain the AUD to stimulate exports and kick-start the economy.
The prospect of quantitative easing (QE) is also something that could come into the equation and potentially weigh on the Aussie dollar. In its November Board meeting minutes, the RBA noted that the effectiveness of interest rate cuts may differ at these levels compared with historically higher levels. RBA Governor Philip Lowe has tabled that QE could become an option if the cash rate reached 0.25% and data were moving away from employment and inflation targets.
Meanwhile, the US economy is showing more signs of resilience and robustness, particularly the booming jobs market. In last week’s Board meeting, the Federal Reserve hinted at a steady outlook for interest rates into 2020, not only suggesting they remain confident in the US economy, but also supporting the strength of the USD. While next year’s rate decisions will still be driven heavily by data coming through, corporate tax cuts and this year’s interest rate cuts should provide sufficient economic stimulus.
Heightened trade volatility and political influence
The Australian dollar has come under pressure in recent times due to growth concerns stemming from the ongoing trade spat between the US and China. Last week’s interim trade deal paves the way for a couple of permutations that may influence the AUD/USD currency exchange rate in 2020.
On the one hand, improved trade certainty and the removal of tariffs should aid Chinese economic growth and in turn, shield Australian economic activity. However, at the same time, the US is also looking likely to emerge as a beneficiary on account of minimum agricultural purchases locked into the deal that should support exports, assist the US economy and underpin the USD.
There is also the distinct possibility that trade disputes could continue. While markets breathed a sigh of relief last week, the deal is only an interim agreement, and hasn’t even been signed yet. What’s more, with next year’s US presidential election, it’s possible that President Trump may reignite his hawkish trade rhetoric against China to appeal to his voter base. It’s also not beyond the realms of possibility that Australia, despite reassurances, could face the brunt of any unexpected and sudden trade tariffs, just as Argentina and Brazil recently encountered.
In either case, an unpredictable political landscape involving resurging trade threats could weigh sharply on the Australian dollar.
Telling macroeconomic pressure and downside risk
While there is upside to the Australian dollar if trade risk subsides and the economy begins to pick up at a faster rate than expected – potentially with a recovering housing sector – this is outweighed by the prevailing macroeconomic risks carrying through from this year.
Local economic growth remains tepid and unlikely to rebound in the short term as stimulatory measures should take longer to play out than those spurring the US economy. The RBA is almost certain to lower Australian interest rates in 2020, while the Fed Reserve has signalled expectations for a stable outlook in the US. Finally, renewed trade threats cannot be ruled out given the volatile political landscape heading into an election year, as well as the fact that US-China negotiations have only focused on an interim deal so far.
All in all, each of these macroeconomic risks support our view that the Australian dollar may remain under pressure next year, with a forecast exchange rate of 0.65 USD by the end of 2020.