Dollar Drop
Over the last few days both the Australian dollar and NZ dollar have made significant gains against the US dollar, up to US$0.72 and US$0.67 as the US dollar has fallen across the board. Renewed concerns around global growth this year, a patch of recent soft US economic data, and cautious comments by a US Federal Reserve policymaker on Wednesday have seen the market move to pricing the chance of a US rate hike this year at 50%. The prospect of higher interest rates in the US has been a driving factor of USD strength in recent times (as a higher interest rate on USD cash encourages investment into USD) and given recent developments we have seen the USD drop sharply over the last few days. We believe the market moves are premature, and while the US Fed is unlikely to raise interest rates in March, we still expect it to follow a gradual path of higher rates over the course of 2016. In terms of economic data important monthly US employment data (nonfarm payrolls) will be released tonight and should provide further signals on the US labour market.
AUD & NZD Outlook
Given our core view over the medium term is for higher interest rates in the US, and interest rates remaining low in Australia and NZ, this should place downward pressure on the Australasian currencies. Long term currency moves are generally a reflection of the difference in interest rates between countries. As these two rate equalise over the coming years (with the US Federal Reserve gradually raising their interest rates), further pressure is likely to be exerted on the AUD & NZD. More recently, for the NZD in particular, dairy prices have been on a downward trend once again which generally should see the NZD move lower. At the same time key exports in relation to the AUD are hard commodities such as metals and oil, which remain at depressed levels.
Chart of the Moment
When looking at the AUD and NZD moves, it is important to keep in mind the bigger picture. Both currencies are down significantly in recent years, and a key thematic of our model portfolios is investing in stocks which benefit from a weaker AUD and NZD.