© Michael Workman
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Asia-Pacific economies are now feeling the pinch of a Chinese economic slowdown, being under large downward pressure.
Talking about concerns over the health of Chinese economy, we are currently pushing back our optimistic forecast of economic recovery in the region. While we keep our forecast of China's official GDP growth in 2015 unchanged at 7%, we lower our 2016 GDP growth forecast to 6.5% from 6.9%. The major drag on China's economy is likely to remain the same: decelerating growth in heavy industry, poor export growth, and weak new housing construction. Hence, the chance of a hard landing in China is also unlikely because a significant amount of policy stimulus is already in place with more to come.
As concerns commodities, we expect prices to remain subdued as global demand fails to significantly pick up because China's economy is taking longer to recover. Meanwhile, the largest global mining investment boom in four decades will continue to generate increased global commodity supply. These two trends will put fresh downward pressure on commodity prices and Australia's terms of trade in the near term. And any sustained pickup in commodity prices also looks unlikely.
Another issue is that the US Dollar should strengthen at a modest pace in the future. The US unemployment rate dropped to 5.1% in August reflecting a stronger economy. The country's average hourly wage growth remained at 2.2% p.a., but was stronger than expected. Another issue is that the US Dollar should strengthen at a modest pace in the future. The US unemployment rate dropped to 5.1% in August reflecting a stronger economy. The country's average hourly wage growth remained at 2.2% p.a., but was stronger than expected. The underlying strength of the US August labour market report provides the Fed with more confidence to begin raising interest rates by year-end, and continue steadily lifting interest rates in 2016. Once the Fed begins hiking interest rates later this year, we are likely to see fresh downward trend in Australian economy.Against this background, we do not see the economy recovering in the Q4 of 2015 and are lowering our forecasts for the growth in Q1 next year.
The Aussie is already vying with the New Zealand Dollar as the worst performer in the past year among developed market currencies, following a nearly 24 per cent drop. Where do you see the Aussie against its major counterparts next year?
Technically, most financial markets are re-testing or have already retested the global financial crisis lows. The Aussie is likely to do the same with the above fundamentals in the driving seat. Hence, depreciation in the AUD/USD to 0.6500 is now our central scenario but the risk is that cross moves lower towards 0.6000. This is a typical part of a currency overshoot when global growth fears begin to dominate.
What other factors could influence the downtrend performance of the Aussie?
One of the reasons why we may see the depreciation of the Aussie is that the RBNZ cut official interest rates again to 2.75%, which will apply fresh downward pressure to the NZD/USD currency pair. The AUD/USD will move lower by way of association. A similar pattern tends to occur to the Sterling when the European Central Bank reduces interest rates.
A softening global economy is triggering a series of developments. The ECB revised down their inflation forecasts in early September, and global disinflation fears may reignite as global energy prices remain in a downtrend. There is a risk the Swiss National Bank will cut interest rates again because of accelerating deflationary pressures, and a nominal GDP recession appears possible. The Bank of Canada could also trim rates again before the end of the year now that the Canadian economy is officially in a recession. All of these developments tend to put downward pressure on the Australian Dollar.
What are your forecasts for AUD/USD, AUD/NZD and AUD/JPY by the end of 2015?
Our forecast for the AUD/USD stands at 0.66 in the Q4 of 2015. Talking about the AUD/JPY, we expect it to trade at 78.0 levels, and the AUD/NZD we see at 1.10.