Goldman: AUD Is Doomed; To Fall To 0.80 On Pure Macro Fundamentals
The recent break below parity of AUD/USD is getting most of the market's attention.
In part, the AUD weakness reflects the dovish tone of the RBA, but the bigger driver is likely to be the rise in US rates, on the back of the recent batch of better US data, which has generated a USD rally across the board, says Goldman Sachs.
Such a move in AUD/USD has led market participants to ask how far the AUD could weaken against the greenback and, relatedly, whether or not AUD/USD will recouple from its traditional drivers – namely interest rate differentials and commodity prices.
To address this question, Goldman Sachs looks into where AUD/USD should be trading given its most basic macro fundamentals:
"The current 2-year swap rate differential between the two countries and Australia’s terms of trade. Over long periods of time, these have been the central parts of most successful models of the AUD. Based on our 'fair value' estimate for the 2-year swap rate differential and our year-ahead forecast for Australia’s terms of trade, our model suggests that the cross could fall to 0.80 at least, judging by the macro outlook," GS finds out.
"This is in line with our current estimate of fair value, GSDEER. However, our fair value estimate suggests that AUD/USD could fall further – GSDEER is 0.74 in 2016 – reflecting our expectation that Australia’s terms of trade will continue to deteriorate sharply. If commodity prices continue to fall, the macro backdrop for the AUD would imply potentially even more," GS adds.