Bank of Queensland Limited

11/30/2020 | News release | Distributed by Public on 11/29/2020 22:51

Economic and Financial Market Update: The $A - One Step Sideways, Two Steps Forward

Summary:

  • Australian GDP growth will be strong in H2 2020;
  • But there is greater uncertainty about the first half of next year;
  • This suggests that more fiscal stimulus may yet be required;
  • And a further increase in bond buying by the RBA;
  • I look for the $A to head towards 75c in coming months;
  • And then perhaps to 77-78c sometime next year.

I have thought for some time the second half of this year would be strong. First as Australia ex-Victoria opened up much of their economy (Q3), and then Victoria (Q4). I have been more cautious though about the first half of next year. Partly that reflects uncertainty about the path of the virus. But the economy is getting plenty of help. There are now realistic scenarios where GDP growth could be very strong over the next couple of years (and a factor behind the recent strength of the equity markets and the $A).

The biggest unknown is whether consumer and businesses spend. Households are saying it is not yet time to spend up big in the shops. Firms have boosted the size of their capex budget. But investment plans are still well down on last financial year's spend.

The central case economic forecasts for the next two years is still not good enough. Current projections have fiscal policy support being sharply reduced in the next financial year (although the total government budget deficit will be still be wide). This suggests that most Governments (particularly the Feds) may have to do a little more than currently projected next year. It also means that the RBA may have to further increase the size of its bond-buying program.

There is no doubt that the past month has seen positive factors line up for the $A. Iron ore prices (after adjusting for inflation) are near historically high levels. This has helped Australia record a significant current account surplus. Right now my simple model for the $A says 'fair value' is about 75c. This view is consistent with the level of the real exchange rate. Views on the economic outlook remain critical for the outlook for the $A. I look for the $A to head towards 75c in coming months, and perhaps then on to 77-78c sometime next year. The path of COVID over the next six months will play a big part in that story.

To read my full update, click here.

We live in interesting times!

Regards,

Peter Munckton - Chief Economist