Like years past, 2012 proved to be a year filled with many geo-political and economic events that greatly impacted the global economy and the direction of all major currency pairs. Some painted a picture of an improving economic environment, slowly regaining steam after the financial collapse of 2008. Conversely, other events showed a more bearish picture of the global economy and threatened to cast some of the world’s largest economies back into recession.
The U.S. dollar took its direction from these events and yo-yoed with the prevailing risk sentiment throughout the year. As the world’s reserve currency, the U.S. dollar historically has gained during time of financial or geo-political turmoil as investors sought the relative safety of the greenback. In 2012, we saw a similar correlation, with the U.S. dollar coming under pressure as higher-yielding assets, such as stocks, rose.
In general, equities had a much stronger year than 2011. Indeed, the U.S. was one of only two countries whose equities rose in 2011. In 2012 however, stocks rose globally. The Dow Industrial Average rose nearly 6.0% and both the European Stoxx 50 and the Japanese Nikkei closed the year at their highest respective levels of the year. The emerging market countries of Brazil, Russia, India and China (BRIC) saw their equity markets rebound after falling 20.0% collectively during the year prior.
The slow rise of global risk-on sentiment was not without interruption. The continuing European debt crisis, political uncertainty in the U.S., parts of Europe and Japan, and worries over a Chinese slowdown all put downward pressure on risk and boosted demand for the greenback.
As a whole, the greenback ended 2012 relatively right where it began the year as competing market forces pulled the dollar in opposite directions. Indeed, the U.S. Dollar Index (DXY), which compares the dollar versus major currencies, closed the year only 0.5% weaker after trading in a historically tight 7.0% range.
We expect the dollar to continue to move in lock-step with risk sentiment, but we also see the greenback continuing to respond to monetary policy decisions made by central banks.
Currency Outlook 2013
Tempus Inc.
1225 New York
Ave, NW
Suite 200
Washington, DC 20005
John Robert Doyle II
Director of Markets
(202) 787-3462
Andrew Dilz
Foreign Exchange Strategist
(202) 785-2274
[email protected]
www.tempus-us.com
In this report, we will look at the fundamental outlook of a number of major economies and examine how they will affect the overall risk sentiment as well as the monetary policy of that country or currency group’s central bank. Through this process we can gain a better understanding of where the U.S. dollar is headed against the majority of its rivals in 2013.
US Economic Fundamentals
The U.S. economy continued to slog through most of 2012, battling sluggish growth and chronically high unemployment. However, in comparison to 2011, 2012 looked like a banner year. The final reading of 3rd Quarter gross domestic product showed that the U.S. economy grew 2.6% year-over-year and many economists predicting 4th Quarter GDP will register in a similar range. These prints are markedly higher than the 2.0% growth in 2011.
At the end of 2012, growth was constrained by the uncertainty surrounding the “fiscal cliff” negotiations in Congress. Falling off the “cliff” would have resulted in 600 billion dollars in automatic spending cuts and tax hikes that were sure to send the American economy spiraling into another recession. In an 11th hour deal brokered on January 1st, the House of Representatives broke a yearlong impasse, and passed a bill making income tax cuts started under George W. Bush permanent for the majority of Americans. However, the deal did little to get the country’s fiscal house in order and may negatively affect the U.S. credit rating in the future.
In addition to failing to pass significant spending cuts, the “cliff” deal also failed to address the raising of the nation’s debt ceiling. Early in 2013, expect investors to shift their attention to this next battle on Capitol Hill. Congress must act by late February or early March to continue to fund the U.S. government. Raising the ceiling does not authorize more spending; rather it allows the U.S. government to pay for legislation that has already been passed by Congress. Still a lengthy battle between Republicans and Democrats is expected. The result will likely to put downward pressure on risk appetite, and give the U.S. dollar a short-term boost. It is our opinion that after smoke clears following the fiscal cliff and debt ceiling deals, the U.S. economy is set to outpace many of its counterparts.
The jobs market saw some momentum with non-farm payrolls adding over 950K jobs in the past six months, including
The U.S. continued to grow at a modest pace in 2012, holding above 2.0%
throughout the year.
President Obama and Speaker Boehner kept the U.S. from falling off the fiscal
cliff, but the pair must forge a deal to raise the country’s debt ceiling.
stands at 7.8%, down from a peak of 10.0%, but the rate masks the decline in the labor force participation rate as people became discouraged looking for work.
We expect U.S. payroll gains to maintain their momentum and add about 160K jobs per month throughout the year. The resulting unemployment rate will close 2013 at 7.4%.
The housing market has also shown signs of revival. Housing starts have registered near 900K, up from a low of 523K in 2009. In addition, the Case-Shiller Home Price Index has shown monthly increases since March. We expect the modest upswing in housing to continue in 2013 as more Americans are able to find work and as consumer sentiment stabilizes following the fiscal cliff.
Other aspects of the U.S. economy also have a slightly rosier outlook. Industrial production rebounded in November, rising 1.1% month over month, offsetting weakness in October due to Hurricane Sandy. The ISM Manufacturing Index remains near the 50.0 level, the break-even level for growth.
Consumer consumption remains the largest part of the economy, accounting for nearly 70.0% of GDP. Retail sales over the course of the year were mixed, with the latest reading showing a rise of 0.4% in November. The print followed a dismal -0.2% in October. December sales have not been released but economists expect a gain of 0.2% after a slower than expected Christmas rush. Nevertheless, we expect consumer consumption to pick up moving into 2013 as more Americans enter the work force and as other aspects of the economy improve. We expect retail sales to grow tepidly between 0.4%-0.6%.
Overall, we believe the U.S. economy will grow at an annualized rate of 2.3-2.5% in 2013 on increased consumer consumption, boosted by improving labor and housing markets. While this recovery in the U.S. remains weak in comparison to previous post-recession recoveries, we expect the American economy to continue to out-perform most other advanced economies next year.
Federal Reserve, Interest Rates and Quantitative Easing
In a continued attempt to boost the sluggishly recovering economy, the Federal Reserve left the Federal Funds Rate at an all-time low of 0.0%-0.25% for the duration of the year. Federal Reserve Chairman Ben Bernanke has stated that the
We expect payrolls to gain an average of 160K a month in 2013 resulting in a
7.4% unemployment rate.
We expect retail sales to moderately improve in 2013 as consumer confidence
central bank expects to keep interest rates at their current level as long as the unemployment rate remains above 6.5%. Therefore, we expect the U.S. central bank to keep their rates unchanged throughout all of 2013. However, the possibility of other changes in policy will undoubtedly affect the direction of the U.S. dollar.
At its December meeting, the Fed announced plans to expand the size of asset purchases (also known as quantitative easing or QE) by 45 billion dollars as Operation Twist expired at the end of the year. This move was not surprising as the Fed has maintained a very accommodative policy for a number of years in an attempt to bolster growth.
However, minutes from the December FOMC meeting revealed that policy makers were split on the timing to end their current policy, including its asset-purchase plan. A few voting members expressed the concern that “holding interest rates low for a prolonged period could lead to financial imbalances and imprudent risk taking.” The minutes also stated that all members but one judged that “continued provision of monetary accommodation was warranted” but the timeframe was not uniformly agreed upon. The dollar immediately improved after the release of these minutes as some market participants increased bets that the Fed could end its quantitative easing program by the end of 2013.
We believe that the Fed will not only hold interest rates at a record low this year, but they will also leave their asset-purchase program unchanged. Bernanke has continued to warn that the Fed expects only modest improvement in U.S. economic fundamentals with risks remaining in the labor, consumer and housing markets. With inflationary pressures remaining in check, the Fed will find the scope to keep measures accommodative throughout the year.
As previously stated, we expect the economic outlook to improve slowly throughout the year once the hurdles of the fiscal cliff and the debt-ceiling are cleared. Therefore, we expect speculation to increase late in the year as to when the Fed may end its quantitative easing in 2014.
Dollar Forecast:
We expect the U.S. dollar to maintain its role as a “safe haven” and to ebb and flow with risk sentiment for the duration of 2013. Much like 2012, we believe the greenback will trade
Ben Bernanke and the U.S. Fed will keep policy unchanged in 2013. However, discussion of possible tightening in 2014 should give the dollar a boost during the second half
within historically tight ranges during the first six months of the year.
By the end of the third quarter, the discussion of future tightening of monetary policy in the U.S. paired with continued accommodative monetary environments in Europe and Asia should give the dollar a boost during the 4th Quarter. As a result, we expect the U.S. Dollar Index (DXY) to improve slightly be the end of 2013.
European Monetary Policy; Further Rate Cuts Ahead?
The European Central Bank’s monetary policy will once again be centered on subduing contagion in 2013. Debt stricken peripheral euro-zone members will be closely monitored, as their compliance with austerity measures and debt reduction targets will be the truest of measures lending scope to the progression of the currency bloc’s crisis fighting scheme. The past year is perhaps best described as a year of ECB action. In July, the central bank decided to cut their benchmark interest rate from 1.00% to a record low 0.75% in an attempt to encourage spending. European Union finance ministers also agreed to establish the ECB as the single supervisor of the European banking sector, beginning in 2014.
The most impactful crisis fighting measure taken was announced just before the August 2012 policy meeting, and can now be looked at as a possible tipping point in the battle. The announcement of the Outright Monetary Transaction (OMT) program by Mario Draghi, though not yet utilized, allows the ECB to purchase government-issued bonds with maturity between one and three years at an unlimited clip. This program was designed to provide liquidity in the bond markets for ailing countries such as Spain and Italy, whose ten year bond yields had been trading at unsustainable levels; threatening a credit freeze.
Currency markets went through a digestive stage after Draghi’s OMT announcement. First, markets were thrilled with the plan, and bond yields in Spain and Italy began to subside. However, the 3.5% increase in the EUR/USD in the two weeks following the announcement was short-lived, as markets were becoming dissatisfied with merely the threat of ECB intervention. Indeed, Spanish Prime Minister Mariano Rajoy was very public with his intention to refuse OMT participation, fueling speculation that Spain’s bond market had over exaggerated gains.
While the ECB cut rates this year, they still have a higher interest rate than the central banks of the U.K. and the U.S.
As it stands, the OMT remains an unused, protective umbrella shielding Italy and Spain from rising bond yields while buying troubled members invaluable time to deal with the crisis. Unfortunately, the economic fundamentals in both countries are lingering in a fragile, unhealthy state. If the fundamentals continue on their path it could begrudgingly cause each to accept the conditions that come with the OMT program if the extra time bought is not made use of correctly.
Eurozone Economic Fundamentals
The fundamental economics across the euro-zone remain dismal. Euro zone unemployment is sitting at a record high of above 11.0%, and the news is even worse for Spain and Greece, who both have unemployment rates above 24.0%. Worse still, over half of Spaniards and Greeks under the age of 25 are unable to find employment, while the prospect of a better job market in 2013 is bleak.
The outlook for France and Germany, the euro-zone’s two largest breadwinners is not shining brightly either. France, under new socialist party President Francois Hollande has seen the outlook for growth trend much worse in the last year. After stalling in 2012, many economists are describing the French government’s budget projection of 0.8% growth in 2013 to be overly optimistic as the nation will feel the harsh effects of the debt crisis throughout next year.
We will also closely monitor Germany’s ability to withstand contagion pressures in 2013. As 2012 came to a close, we saw Germany begin to show signs of once nonexistent vulnerability. The German economy grew only 0.7% on the year, and could be in line for a second consecutive year of disappointing growth, strengthening the argument for euro bears.
Finally, it will be important to keep an eye on the solvency of the fragile Spanish banking system as we look toward 2013. Spain received a miniature bailout for its banks in 2012, avoiding an official bailout, but the drab balance sheets will make an unforeseen shock very difficult for Spain to absorb. Such an event could be the tipping point that triggers Mariano Rajoy’s much anticipated formal request to participate in the Outright Monetary Transaction program.
The announcement of the OMT in August allowed Italian and Spanish bond yields to
Euro Forecast
With the eventful 2012 in the rear view, we expect monetary policy in Europe to remain inertly accommodative in 2013 as the ECB shifts from aggressive crisis fighting measures to a more supervisory role. The two ways out of the debt crisis are growth, favored by struggling nations, and austerity, favored by the financially secure. Extensive austerity measures are already in place across Europe, and must be closely monitored throughout 2013 as political pressure and social unrest will test the resolve of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations.
We believe the EUR/USD will finish 2013 at 1.2750 as the possibility of yet another ECB rate cut will have investors selling the common currency. The euro-zone is yet to feel the full brunt of the austerity measures, and while the cuts are necessary to reduce the spending portion of the debt-to-GDP equation, they will also have an ominous effect on economic growth. Ultimately, unusually high unemployment will not be turning around, resulting in a continued slowdown in consumer spending and business sentiment. Expect these factors to induce a rate cut of 25bps to the already record low ECB interest rate in the second half of 2013, resulting in downward trending EUR/USD as the year comes to a close.
British Fundamentals, Triple Dip Recession?
Despite a difficult year for the U.K. economy, the British pound was able to slowly, but consistently, gain versus the U.S. dollar throughout 2012. As a higher-yielding currency, the sterling rose against the greenback with the improving global risk-sentiment. In this case, rising tides lifted all higher-yielding boats. Overall, the GBP/USD cross traded in a 6.0% range, with the sterling gaining 4.5% versus the U.S. dollar, closing the year near its strongest level.
The British economy spent the first half of 2012 struggling to return to growth after slipping in its second recession since the 2008-2009 financial crisis. Britain has been teetering on the line of growth and contraction since strict austerity measures were implemented by the coalition-government led by Conservative Prime Minister David Cameron. While the first two years of the austerity plan focused on increasing revenue, recent and future tightening have predominantly fallen on the expenditure side. The reduction in government consumption
The British pound gained versus the U.S. dollar, adding 4.5% over the course of 2012.
Euro Forecast:
Q1
1.3200
Q2
1.3100
Q3
1.2900
continues to be in procurement and compensations of public sector employees.
After spending the last quarter of 2011 and first two quarters of 2012 in a recession, defined by two consecutive quarters with negative growth, Britain recorded economic growth of 1.0% in the third quarter. Despite the recovery, most of the rebound was driven by a technical bounce due to the London Olympics and to a lesser extent the Queen’s Jubilee celebration.
As the year came to a close, the outlook for the British economy darkened. Consumer sentiment for December plunged to -29 from an 18-month high of -22 in November. The relapse in consumer confidence may dash the hopes that British consumers can play a leading role in helping the economy develop sustainable growth. Adding to this narrative, in late December the Confederation of British Industry released data showing retail sales growth for the Christmas season had slowed, prompting fears for 2013 retail prospects as well. We believe that the British economy is likely to slip into a triple-dip recession by the second quarter of 2013. In early January, the National Institute of Economic and Social Research (NIESR) published its monthly estimate of UK GDP figures which show the U.K. economy likely contracted in the final quarter of 2012. Continuing austerity will erode household budgets and spending throughout the year.
However, we see the economy returning to growth in second half of the year, boosted by a recovery in the services sector. We also expect the manufacturing sector to return to modest growth and the sharp decline in construction seen in 2012 should start to bottom out next year. Therefore, we expect the U.K. economy to grow about 1.0% on a year-over-year basis in 2013. However, risks to the economy’s recovery remain. A spike in inflation or a renewed threat of the European debt crisis would likely dampen growth.
Inflation and the Bank of England
The Bank of England has kept their interest rate at a record low of 0.5% since 2009 in an attempt to boost the fragile economy. In addition to low rates, the central bank embarked on an asset purchase program in 2009, known as quantitative easing. They maintained this loose policy throughout 2012. At the BoE’s last meeting in December, the central bank’s asset purchase target was 375 billion pounds.
We believe the U.K. economy will once again struggle in 2013 and likely dip
The BoE’s nine-member Monetary Policy Committee has been handcuffed over the year as some members see the need to stimulate the economy further, but elevated inflation levels makes such a move risky. Year-over-year consumer prices in October and November registered at 2.7%, after falling to 2.2% in September. While prices are down from a high of 5.2% in September of 2011, they have remained above the Bank of England’s 2.0% target since December 2009.
Economists are roughly split on whether the BoE will restart asset purchases in the future. In early December, BoE Governor Mervyn King and his deputy governor Charlie Bean both left the door open to future asset purchases. Another MPC member Paul Fisher told a parliament committee that the economy might need more stimulus in early 2013. A dip in consumer prices could give the BoE the scope to loosen policy further, putting downward pressure on the British pound. In the longer-term, the future of BoE’s asset purchases will lie in the hands of King’s successor, current Bank of Canada Mark Carney, who takes over in London this July.
British Pound Forecast:
We believe the British pound will remain range bound in early 2013 as it has been able to hold the 1.60 level versus the U.S. dollar since November. However, we expect a slew of negative economic data to shift market participant’s attention to the diverging growth stories between the United States and the United Kingdom. As previously stated, we expect the U.S. to recover at more than double the rate of the U.K. in 2013. The outlook for monetary policy will also weigh on the sterling throughout the year. Towards the end of the year, we expect policymakers in the U.S. to begin discussing the end of its is asset-purchase program. Conversely, the Bank of England may expand its asset purchases if the inflationary environment allows. The differing economic and monetary policies should lead the GBP/USD to reverse directions in 2013, allowing the U.S. dollar to regain 5.0% versus the sterling this year.
Inflationary pressures have remained above the Bank of England’s target since
December 2009.
British Pound Forecast
Q1
1.6100
Q2
1.5900
Q3
1.5750
Bank of Japan; More Easing in 2013
The final month of 2012 saw a dramatic shift in investor perception of the Japanese yen’s value as a safe haven currency. The election of new Prime Minister Shinzo Abe of the Liberal Democratic Party prompted a weighty sell-off of the yen after the currency had been locked in a 6.5% range between the second and third quarters of 2012.
The yen ended the year 11.35% lower against the USD and 13.10% weaker against the euro. Indeed, the yen closed 2012 near levels not seen since August 2010, and was by far the worst performer among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes.
Prime Minister Shinzo Abe has adamantly stated his intention to take decisive action in the fight against deflation. Abe will also ensure the Bank of Japan takes on his mission to aggressively pursue additional monetary easing. A softer yen has the Japanese economy primed to break out of its lasting slump, as Japanese goods inherently become more competitive in overseas markets.
The weaker yen has already had a positive effect on Japanese equities. The Nikkei 225, which has been essentially flat since 2009, received a jolt from the easing rumors. The index rose over 20.0% from early November 2012, reaching a fresh two-year high. We fully expect this positive trend to continue throughout 2013 as the extraordinary measures set to be enacted by the BOJ will be able to cure the ills of some of Japan’s largest exporters.
Current BOJ Governor Masaaki Shirakawa is scheduled to step down from his post in April and will be replaced by someone Prime Minister Abe says “can push through bold monetary policy.” One such policy is a raised inflation target from 1.0% to 2.0% in an attempt to combat Japan’s chronic deflation. Abe insists financial markets will not react to long term targets, and that 2.0% inflation must be achieved in the medium-term through strong determination.
The Yomiuri newspaper has reported the Japanese government is expected to raise its economic growth forecast for 2013 to above 2.0% on hopes the new administration will deliver on their promises of policy changes. The expected rebound in overseas growth would also help the Japanese economy grow faster than the current projection of 1.7% in 2013.
After trading to its strongest level since WWII in late 2011, the Japanese yen retreated over 11.0%
versus the U.S. dollar in 2013.
Newly-elected Prime Minister Shinzo Abe is pushing the BoJ to increase
quantitative easing to boost the economy and weaken the yen.
Japanese Yen Forecast:
We expect the Japanese yen to weaken in a consistent manner throughout 2013. While the already extensive USD/JPY move has some investors wary of reaching a ceiling, we believe the yen still has considerable downside risks yet to be realized. The new leadership has yet to be appointed in the Bank of Japan, and easing policies have merely been voiced. Expect the new policymakers to pave an innovative path where the previously separate entities of the government and the central bank will merge to strongly weaken the currency in an attempt to bolster the economy. We believe this will result in a yen that is 10% weaker by the end of 2013, with a steady depreciation throughout the year against the greenback, closing above 95 for the first time since May 2010.
Commodity Based Currencies: Canadian Dollar
The Canadian “loonie” held a rather tight range versus the U.S. dollar in 2012 as the Canadian and the American economies remained tightly related. Indeed, the USD/CAD pair traded in a 7.0% range with the Canadian dollar gaining less than 3.0% versus its American counterpart during the year.
Historically, the loonie has fluctuated with the price of oil, as Canada is the 7th largest crude oil producer in the world. A rise in the price of “Texas gold” in 2011, led the loonie higher against the majority of its counterparts. However, while the price of crude oil fluctuated greatly in 2012, the commodity’s price closed the year right at the yearly average and produced a lesser effect on the direction of the currency.
The outlook for the currency in 2013 will rely on factors such as the performance of Canada’s domestic economy, monetary decisions by the Bank of Canada and the price of oil.
As Canada’s largest trading partner, the health of the domestic economy will rely heavily on the growth of its southern neighbor. As previously stated, we expect the U.S. economy to grow at a pace of 2.3-2.5%. We expect the Canadian economy to register slightly weaker growth, around 1.7-1.9%. Canada’s once robust housing market is showing signs of a slowdown and other aspects of the economy such as consumer demand and government spending seem to be subsiding. While the pace of job growth so far remains healthy, concern over high
The Canadian dollar held a tight range in 2012, gaining less than 3.0%
versus the U.S. dollar.
Japanese Yen Forecast
Q1
88.00
Q2
90.00
Q3
93.00
household debt burdens has contributed to the more moderate consumer spending and household borrowing prints. While the two economies will continue to track each other, we expect the U.S. to slightly outpace the Canadian economy, putting downward pressure on Canadian dollar versus the greenback. While risks to the Canadian economy will remain in the new year, the Bank of Canada has been unwavering in its view that it will need to hike interest rates eventually, even though it kept its overnight lending rate at 1.0% for the duration of 2012. In early December, the BoC repeated wording for its rate outlook that signaled it is leaning towards tightening monetary policy. This makes the Bank of Canada the only central bank in the Group of Seven wealthy nations with a rate-tightening bias. By contrast the U.S. Federal Reserve has said it expects to keep its main policy rate near zero until at least mid-2015.
A Reuters News poll released in December showed that global forecasters expect the BoC will raise interest rates in the fourth quarter of 2013. If the BoC raises interest rates, it will give the loonie a boost versus the U.S. dollar even as the Fed is expected to begin discussing ending its quantitative easing program.
The last major factor that will affect the Canadian dollar is the price of crude oil. We believe the outlook for the global economy will be modestly brighter in 2013 than 2012. As such, we expect demand for the price of oil to slowly increase throughout the year and average above $100 a barrel. The increased demand for commodities will boost the loonie versus the majority of its rivals. There are risks to this prediction as a fresh bout of risk-off trading sparked by the European debt crisis or a slowdown in Chinese growth could send stocks and the price of commodities sharply lower.
We believe that competing forces will pull the USD/CAD in differing directions during the course of the year. Therefore, we expect the Canadian dollar to end 2013 largely unchanged versus the U.S. dollar with a slightly bullish bias.
The Bank of Canada is expected to raise rates in late 2013.
Mark Carney will leave the BoC and join the Bank of England this summer.
Canadian Dollar Forecast
Q1
.9900
Q2
.9850
Q3
.9800
The Aussie and the Kiwi
The Australian and New Zealand dollars are known as commodity-based currencies because the countries possess large quantities of commodities, such as industrial and precious metals. As such, these resources make up a significant amount of the economy’s exports and overall gross domestic product. As a general rule, as the price of commodities rise, the AUD and the NZD follow suit.
Expectedly, the Australian dollar and the New Zealand dollar traditionally move in lockstep with each other against the greenback. Geographical proximity makes the New Zealand economy heavily dependent on Australia, their primary trading partner.
In what was a disappointing past twelve months for global growth, the Aussie closed the year a narrow 1.5% stronger than the 2012 open against the USD. This slim move is a bit deceiving, as the currency traded in a wide 10.5% range on the year. Similarly, the kiwi traded in an 11.3% range against the dollar while strengthening 6.0%. The Kiwi outperformed the Aussie by 4.7% in 2012, trading in a predictably tight 6% range.
The Reserve Bank of Australia had a busy year, cutting their benchmark interest rate four times, bringing their 4.25% lending rate down to 3.00%. Despite these cuts, the AUD appreciated from its weakest levels in the summer after ECB President Mario Draghi announced his willingness to purchase unlimited clips of bonds on the secondary market to protect the euro-zone from contagion. This OMT announcement provided a major boost to higher-yielding currencies like the Aussie and Kiwi, who both still have interest rates relatively higher than their major counterparts.
The Reserve Bank of New Zealand’s benchmark interest rate remained steady at 2.50% throughout 2012. The narrowing of Australia and New Zealand’s interest rate differential is a textbook example of interest rates affecting currency pairs and explains the Aussie’s weakness against the Kiwi.
The direction of the Australian economy is historically linked to the performance of China, the largest importer of Australian goods. We expect Chinese GDP to pick up and recover from last year’s disappointing growth. Chinese power consumption, which many deem more telling than the gross domestic product data, is expected to grow more than 9.0% this year. In 2012,
Despite trading in a wide range, Australian dollar only gained 1.5%
against the U.S. dollar in 2012
While the Kiwi gained modestly against the Aussie in 2012, the pair continued its
power consumption in China grew only 5.5%, after growing 12% in 2011.
Australia is the world’s third largest producer of gold, paving the way for a positive correlation between the price of gold and the AUD. Indeed, the Aussie and the price of gold both saw a modest gain in 2012. We expect the price of precious metals to retain their correlation to the AUD and NZD in the coming year.
The forecast for Australian economic growth in 2013 is mixed. A survey of Bloomberg economists is calling for an average of 2.7% growth. We believe the Australian economy will outperform these forecasts, as tailwinds out of China will boost growth in Oceania. Also helping growth in Australia and New Zealand will be the extension of policies supporting quantitative easing in G4 economies. The continuation of easing measures will have investors looking for opportunities in higher-yielding currencies.
We expect the NZD and AUD to moderately improve against the greenback in 2013. As the global economy continues to improve after the financial crisis of 2008, we expect demand for commodities to improve and pull the Aussie and the Kiwi higher. The two central banks will likely come under additional pressure to cut interest rates in an attempt to weaken their currencies to boost exports, though these strategies will again be mostly ineffective as the trend of global QE will boost the price of commodities and offset the rate cutting strategies in New Zealand and Australia. Therefore, we believe the AUD/USD will finish the year at 1.0750, with the NZD/USD closing 2013 at .8700.
