© Chris Titze Imaging, Adobe Stock

- AUD/USD has fallen ten cents in 2018.

- The worst is behind us now says Westpac.

- Recovery to 0.72 in the cards for year-end.

The Australian Dollar has fallen from 0.80 to almost 0.70 against the U.S. Dollar this year in probably the steadiest downtrend of all G10 currencies but the worst is now over, according to Westpac.

The bearish trend has been relentless, in line with the old market adage 'the trend is your friend until the bend at the end', some say it will continue as there are few signs to suggest otherwise.

"It now seems only a matter of time until the February 2016 low at 0.6973 is tested," remarks Christopher Roman, an analyst at Reuters, in a recent report on the pair.

Above: AUD/USD rate shown at weekly intervals.

Federal Reserve (Fed) chairman Jerome Powell was behind the latest falls after he said there is a chance the Fed might raise interest rates rate above the 'neutral' level, which is equivalent to the equilibrium level of interest rates.

The neutral rate is estimated to sit around 3.0% by the Fed, while the Fed Funds rate range is currently 2.00% to 2.25%. Powell's comments suggest at least 4 more 0.25% rate hikes still to come, mostly in 2019.

At the same time, the Reserve Bank of Australia (RBA) is not expected to raise its interest rate from its current 1.5% at all in 2019 and so is providing little support to the Aussie currency.

The widening difference between U.S. and Aussie rates is one reason why analysts expect the AUD/USD pair to continue to weaken.

However, Australian lender Westpac says the "big falls are behind us" and there is unlikely to be declines of the magnitude seen this year over coming quarters.

The bank says 2018's decline was due to the market being wrong-footed by an aggressive Fed because back in 2017, few except the Westpac team thought U.S. rates would supersede their Australian counterparts.

"A year ago when the AUD was trading around USD 0.80, Westpac forecast that the AUD would finish 2018 at USD 0.70," says Bill Evans, chief economist at Westpac. "A key argument behind our negative view on the AUD hinged around a substantial shift in interest rate differentials between USD and AUD short term rates, a development that was not anticipated by the market"

Now the surprise factor has gone the downside for the Australian Dollar is likely a lot less now, Evans says. He forecasts a recovery for the AUD/USD rate to a target of 0.7200 by the end of the year.

Evans also says weakness will push the AUD/USD rate to 0.70 by June 2019 but that it should rise back to 0.7200 by the end of next year.

Above: Outline of Westpac forecasts for AUD/USD rate.

Westpac's forecast is based on the expectation the Fed will raise interest rates in 2019 but that it will stop hiking in June, which is earlier than markets anticipate, when the Fed Funds rate reaches only 2.875% due to a likely growth slowdown.

A key factor Evans says will restrain the U.S. economy is the relatively low labour productivity growth rate of only 1.0%, which indicates a corresponding economic growth rate of only 1.75%.

Another factor that could impact on the exchange rate is a hangover from President Donald Trump's fiscal stimulus, which will begin to wear off in 2019. Spending cuts in the second half of the year may also effect growth.

At the same time, Evans flags risks to the forecasts that could push AUD/USD below 0.7000, potentially as far as 0.68.

A possible recovery in commodity prices, which are a key the Aussie Dollar's valuation given the country's large volumes of commodity exports, is a source of upside risk to the forecasts.

Advertisement

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here