AUD and NZD: Further falls in store

Unlike in the past, RBA Governor Stevens did not talk the AUD lower in his interview with the AFR last week.  He indicated little impetus to cut policy rates further, but on the currency he simply noted that the exchange rate is adjusting to the terms of trade and that further adjustment was possible. This was hardly aggressive talk, but further weakness is not just possible but likely.

If commodity prices and the currency hold at current levels, this suggests that the real exchange rate will start next year 9% overvalued, which is well above a one-standard-deviation divergence of 6.5%. With a collapse in real resource share prices pointing to a deeper slump in export prices, it is estimated that fair value could fall a further 6% next year.

"We believe this points to significant downward pressure on the exchange rate and supports our below-consensus forecast that the currency will drop to 63 US cents by the end of 2016. As such, we expect the recent drop in AUD to extend over coming weeks, with little on the data front to give any support to the currency" says Barclays.

Over the next couple of weeks, the only release of note is RBA private sector credit (31 December). 

NZD has similarly dipped lately but has generally registered a positive performance over December. Further declines are expected in the months ahead, especially given NZD is even more overvalued than AUD, and will likely suffer from renewed weakness in dairy prices. NZ November trade data (23 December) are unlikely to offer much support with another sizeable deficit expected.