AUD/USD Monthly Fundamental Forecast January 2016

Outlook and Recommendation

The AUD/USD was trading close to the 0.75 level earlier in the year as Glenn Steven’s of the RBA tried to talk the currency below the level but economic problems in China did the work sending the Aussie to multi year lows before it recovered to end at 0.7288. The pair ended down almost 10% on an annual basis. This month the pair held steady.

The renewed fall of the oil and industrial metals prices is brutal for commodity linked currencies.  Several export countries as well as Russia and South Africa seem to digest this shock with the classical adjustment:

By letting their currency depreciate, the trade balance will eventually improve as imports become expensive and exports more competitive. In Brazil and Colombia, for example, this adjustment process has only just started. Today, it is particularly evident that only very few countries took advantage of the favorable environment during the long period of high commodity prices to reallocate resources towards more productive sectors and thus diversify their exports. A notable exception is Mexico, where manufacturing represents more than 80% of exports. Eventually, only non-primary exports benefit from a weaker currency.

Although the Reserve Bank of Australia is widely tipped to hold the cash rate at 2 per cent, Australian bond yields are expected to follow Treasuries, helped by a record supply of issuance from a deficit-financing Commonwealth.

This, along with further merger and acquisition activity, will hold up demand for the Australian dollar, offsetting drag from a further decline in commodity prices and therefore the country’s terms of trade. NAB sees the terms of trade easing 11.4 per cent in 2016, as the commodity markets continue to work though the mismatch between supply and demand.

Forecasts for the Australian dollar currently range between US65¢ and US72¢ on average next year, with NAB coming in at US67¢ to US68¢ once the currency succumbs to conventional drivers.

Much of this equation pivots around Chinese demand for industrial metals such as iron ore and copper, and for energy such as oil, gas and coal. NAB sees iron ore, Australia’s single biggest merchandise export, at an average $US42 a tonne next year, compared with $US41 when it was last fixed, on Christmas Eve.

However, like many economists, the bank also sees the risk of sharp drop in Chinese steel production and consumption pushing the price of the metal’s main ingredient “closer to $US30 a tonne”.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

Major Economic Events Scheduled In January