© David Forrester
|
We know that the budget estimates can be quite fallible. For example, the government budget in 2014 had to be revised significantly. Having said that, I believe the important parts of the budget are the potential boosts in consumer and business confidence, which strengthens the consumption and investment spending. That will undoubtedly be good for the economy and will actually help the budget to go further. However, the key challenge for the budget going forward will be continued weakness in the Chinese property market, which converts to a weak steel consumption and, obviously, lower coal and iron prices for Australia. In this case, this will continue to be a struggle to the Australian economy and the budget bounce.
Australia's central bank cut its benchmark interest rate to a record low of 2.0% recently to try to revive the struggling economy as a long China-fuelled mining boom fizzles out. Governor Stevens said the broad considered that "the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand". Do you suggest that the just announced cut will not be enough to prevent the economy from stagnation?
We do actually look for another cut later this year, potentially in August or even November. Moreover, we do see a further depreciation of the currency as unlikely but necessary. In case the currency does not go low, more monetary stimulus will have to be provided to the economy via lower interest rate, which would also help keep the lid on the currency itself. Among some other critical factors could be the statement that non-mining investment intentions and the expectations for that by corporates are influenced by the currency. With that being said, whether or not the cut is enough will depend on the budget and how well it is received by consumers and businesses. The final factor would be how much of this improvement in Australian economic data we have seen recently is temporary. As a matter of fact, we do believe it will be temporary and not enough to offset the acceleration in mining investment decline in the upcoming months.
A recent study by Beyond Zero Emissions suggested that Australia has a 50% chance of systemic economic crisis (which means high unemployment, high debt and deep recession) caused by ignoring the global shift to clean energy. Do you consider this shift as a great opportunity for the Australian economy to grow in future? At what cost could this shift take place?
The main problem with the move to green energy in Australia is a large assumption that there is going to be a big turn to it within the whole Asian region, which is not good news. About 20%, or one fifth, of Australian exports are coal, which is considered to be the most unclean of the whole exports, although Australia does have a little invention making the coal quality much higher, leaving the whole picture with an advantage. Yet it is clear that in case of a large shift to the green energy, Australia will have to find some other export revenues. As a matter of fact, they are already doing this. Australia could switch more into agriculture exports, which some mining companies are already doing.
What other factor will be the key determinants of the Aussie behavior in Q2 of 2015?
Generally the key factor remains the FOMC, when they will actually begin to normalize rates. The market has squeezed the Aussie higher, partly on a belief that the Fed is not going to start raising rates in the month of June quarter. I think the Fed is probably the single largest factor out there for the Australian currency going forward.
What are your forecasts for the EUR/AUD, AUD/USD and AUD/JPY in the short and long term?
For the Aussie we have one, three and six-month forecasts. We expect to see AUD/USD pair to trade around 0.77 by the end of the month, at 0.76 in three-month period and 0.74 in half a year. Meanwhile, EUR/AUD will probably reach 1.40 in one month, 1.39 in three months and 1.41 in six months. As for the Japanese Yen versus the Aussie, we look for 0.94, 0.95 and 0.95 for the same period, respectively.