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Do we see an upside for the Aussie dollar?

Australian Dollar on the screen.

Do we see an upside for the Aussie dollar?

We have recently been asked about the Australian currency from several of our investors, and while it’s impossible to predict the future, do we foresee continued pressure on the Aussie dollar against the US dollar over the next 6 – 12 months?

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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Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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Comments

  1. Hi Andrew, yes but the RBA now also seems to be biased towards cutting rates.
    BTW, well done on the performance of the Montgomery Global Fund.
    Kelvin

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