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The Australian dollar is expected to end this year at 74 US cents and end 2019 at 76 US cents, according to the latest research report from St. George Economics. A multitude of factors have placed downward pressure on the Australian dollar in recent months. These include a lift in downside risks to global growth, particularly with rising global trade tensions. In addition, there has been an overall escalation of risk aversion in financial markets.
A great deal of uncertainty is seen surrounding the outlook for the Australian dollar. Key fundamentals, commodity prices and interest rates, are not providing a clear gauge on the direction of the AUD. Moreover, the inclination for US President Trump to backflip on policies suggests that there is significant uncertainty to the global economy and, therefore, the Australian dollar outlook.
There has been a clear shift in the way financial markets are reacting to information since the turn of the year. Over 2018, the relationship between commodity prices and the Australian dollar has broken down somewhat.
A likely explanation for this breakdown is a shakeup in financial market sentiment, increased attention on inflation and concern over rising interest rates. In a risk-averse environment, the Australian dollar tends to come under downward pressure.
Additionally, the widening interest-rate differential between Australia and the US, which has posed a downside risk for some years, might be now having more of an impact in pressuring the Australian dollar lower. The US economy is also once again a standout in the world and performing relatively strongly in comparison to other economies. This comparative strength has assisted in propping up the US dollar against other major currencies.
"Given that uncertainty surrounding global trade negotiations is likely to persist for some time and given that we do not expect the risk aversion in financial markets to subside substantially over the near term, we have downgraded our Australian dollar forecasts," the report added.
