Key themes driving global currency markets
With August 2017 marking the 10-year anniversary since the GFC which devastated the global currency market, the outlook for global currency rates in 2018 is strong.
Global GDP expanded 3.8% during the calendar year 2017, the fastest rate since 2011. The IMF expects the expansion to accelerate in 2018, supported by growth in the developing regions and stimulatory settings in the advanced economies. Critical to Queensland’s exporters, Emerging and Developing Asia is expected to grow annually by +6% into the next decade.
The IMF published the April edition of the World Economic Update which contained upgraded forecasts for global growth. During 2017, global growth accelerated to 3.8%, having achieved an average rate of growth of 3.5% over the previous five years. The improvement in growth was broad-based, with the pick-up in growth in the advanced economies alongside continued strong growth in the emerging Asia region, an encouraging sign for Queensland’s exporters.
The IMF expects the strong momentum of activity will carry over into 2019 with growth rising to 3.9%. Across the advanced economies, the stimulus from US corporate tax cuts and investment incentives is expected to push US growth to 2.9% in 2018, while the accommodative stance of monetary policy in Europe is expected to assist the absorption of excess capacity in the region.
The emerging economies are forecast to expand by 4.9% in 2018, up from 4.8% in 2017. The Chinese and Indian economies are projected to lead emerging markets growth at (6.6% and 7.4% respectively), with the major ASEAN nations of Indonesia, Malaysia, Philippines, Thailand and Vietnam collectively expected to expand by a healthy 5.3% (April Queensland Economic Update).
What about Australia?
The Aussie Dollar
The Australian dollar (AUD) sustained the same level in the first half of April - around the 78c mark - before falling over 2.5c against the USD in the second half of the month.
However, in May, the forecast was revised down with considerations reflecting a slowdown in the global economy and cash rate expectations for Australia as well as a slight firming in the US dollar as inflation there gathers pace.
Overall, the statement was supportive of a higher Australian dollar – although it may not come for some time yet. The cash rate has stood at a record low of 1.5% since August 2016, and financial markets are expecting this to remain the case until mid-2019.
External Drivers to the AUD
Both the US and China will factor heavily into two key things in Australia. The first is, of course, the RBA’s interest rate decisions later this year. The second is the key number in the federal budget - the 3.0% real GDP growth assumption that underpins the forecast return to surplus and the rationale for the personal income tax plan.
President Trump has stipulated the much-anticipated meeting with Kim Jong Un may take place within the coming weeks – this meeting is likely to benefit the AUD through lower global risk. Australia has appeared to sit within the ‘exemption zone’ of President Trump’s trade tariffs, however, the confirmation of whether or not we are excluded is likely to have an effect. Any change in plans is likely to add further downward pressure to the AUD.
Every month this year has brought a fresh batch of lows for 2018. Unless we see a hawkish tone from the RBA or a strong batch of data from the quarterly wage price index or the monthly unemployment rate, the strength of the AUD is likely to continue to be at the mercy of the other major currencies.
At least for the next few months, what happens overseas will be more important for the Australian economy than domestic factors per se.
Internal Drivers to the AUD
Inflation remained steady at 1.9%, below the RBA’s target band of 2-3%. The Australian dollar has remained quite stable against the US dollar and a basket of international currencies since 2016. The RBA has indicated it is comfortable with the stance of monetary policy and is in no rush to raise the cash rate.
With ongoing worries about the Federal Government’s move to increase interest rates and higher bond yields, this is coupled with the aforementioned concerns that President Trump’s tariff increases will result in a global trade war of retaliation and counter-retaliation, potentially resulting in a depression of economic growth and profits.