Macro

Obviously in the near term, week-to-week, month-to-month it’s impossible to predict currencies, but over any medium-term period – you can at least, in our view, make some informed judgments around what the shape of the probability distribution of possible outcomes looks like.

We try not to think deterministically, and predict that the Aussie dollar is going to end up at a particular level, instead we are asking: is it more likely that the Aussie dollar will fall? Or is it more likely the Aussie dollar will rise?

If you had asked me this question four months ago, I would have said that the probability distribution for the future of the Aussie dollar over the next 6 – 12 months was very much skewed to the downside, and best case maybe it goes sideways.

That view has changed in recent weeks, due to two key drivers. The first, is that the Fed has paused. The Fed went from a clear tightening bias to now, basically a pause, signalling no interest rate hikes in 2019. So, interest rates in the US are not rising as quickly as we otherwise thought, which is US dollar-negative and therefore Aussie dollar positive. Furthermore, the Fed will be tapering its balance sheet roll-off to US$15 billion per month of treasuries from US$30 billion with the process being halted by the end of September. This also represents a reduction in US monetary tightening.

Number two is the latest Chinese credit data: it was such an extraordinarily large number at approximately one trillion AUD-equivalent in a single month! That’s equivalent to roughly, 55 per cent of Australia’s GDP in a single month which is huge. So this definitely carries some upside risk for the Aussie dollar over the medium term as well.

These dynamics are fluid and the outcomes unpredictable.

Four months ago I would have said the probability distribution was very much skewed to the downside. And yet, today on a medium term view, I actually believe the probability distribution is skewed more to the upside.



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