Aussie dollar to fall to 60c: AMP Capital's Shane Oliver

Aussie dollar to fall to 60c: AMP Capital's Shane Oliver
Aussie dollar to fall to 60c: AMP Capital's Shane Oliver

GUEST OBSERVER

Following the most anticipated and hotly debated Fed meeting in years the Fed has decided to leave interest rates on hold. More importantly, the commentary around the decision was relatively dovish. After all the hoopla in the run up to the Fed meeting it was all a bit of a non-event really…just as well I didn’t get up at 4am for it! 

The case for the Fed to raise interest rates is well known: the US economy has been growing around 2-2.5% and the labour market has strengthened with unemployment falling to 5.1%. And since inflation normally turns up with a lag after the jobs market there is an argument for the Fed to start hiking interest rates before that actually happens.

As a result a few months ago it was widely expected the Fed would move to start hiking at its September meeting. In the interim though uncertainty about Chinese and emerging market growth has increased and inflation expectations have fallen and so the Fed has rightly responded to this by leaving interest rates on hold. This was in line with US fixed income market expectations that had only priced in a 30% chance of a hike at this meeting.

More importantly though the commentary from the Fed was relatively dovish.

While the so called “dot plot” of Fed meeting participants interest rate expectations is still pointing to a rate hike this year, several participants have moved their view of the first hike into 2016 or 2017, one is now arguing for a rate cut into negative territory and the whole profile of Fed interest rate expectations is  0.25% lower.

On top of this, the Fed is clearly conscious of the risks posed by recent “global and financial developments” (read China and the emerging world) and the downside risks posed by this to US inflation.

The clear message from the Fed is that is that it is aware of what is going on globally and is not going to do anything to threaten global growth at a time when US inflation is below target.

There was no recognition from the Fed that it is any closer to satisfying the conditions for a rate hike. While the Fed is likely comfortable that it has seen enough improvement regarding the jobs market it still seems to lack “confidence that inflation will move back to its 2% objective over the medium term.” And this lack of confidence partly stems from the uncertainty regarding Chinese and emerging market growth, along with the impact of the stronger $US.

While Fed Chair Janet Yellen has indicated that the Fed’s October meeting remains “live” for a rate hike, it’s hard to see enough changing by then to justify lift off. As such December is more likely for a move but there is a reasonable risk that lift off could be pushed into 2016.

In terms of market implications, the move by the Fed to leave rates on hold and indications that it won’t do anything to upset global growth are positive and should help allay some of the upwards pressure on the $US and downwards pressure on emerging market currencies in the short term. However, a Fed rate hike is likely still out there somewhere and uncertainty around it will likely return at some point. It’s likely to come at a time though when there is less global uncertainty and so hopefully should mainly be a constraint on US shares as opposed to global shares.

For Australia, the Fed’s decision is a mixed blessing. On the one hand it would have been better to have seen the Fed able to raise interest rates as it would signal greater confidence in global growth and ongoing downwards pressure on the value of the $A. As it is there is a risk that an on hold for now Fed sees the $A bounce a bit higher. Ultimately though the downtrend in the $A is likely to resume – as the Fed is still likely to hike at some point, the RBA is likely to remain under pressure to cut and commodity prices remain weak – so there is no change to my view that the $A will fall to around $US0.60 in the next 12 months or so.

Finally, perhaps anticipating talk of a “Yellen put” it was of interest to hear Janet Yellen pointing out that the “Fed should not be responding to the ups and downs of markets” but rather to considering “what is causing them” which in this case has been “concerns about the global economic outlook”. It’s hard to argue with that.

 

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.

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