Why the Australian Dollar Could Remain Under Pressure in 2020

This year has seen the Australian dollar trade in a fairly steady downtrend. In August, the AUD dipped to a ten-year low of 0.6671 USD, around 8.5% lower than the 52-week high of 0.7296 recorded back in late-January. With the exchange rate slowly inching higher across the last few months, it is an opportune time to focus on the currency outlook for 2020.

Weakness in the Australian dollar throughout 2019 has been shaped by dovish RBA policy - three interest rate cuts - and a stalling Australian economy. In addition, global trade disputes have played a defining role, with the AUD traded as a proxy to the economy of our major trading partner, China.

Heading into 2020, these key themes are again likely to weigh on the Australian dollar, while political influence could also play a role given next year’s US presidential election. Amid these risks, we are calling for a target of 0.65 USD by the end of next year.

Stalling economic growth

The Australian economy is yet to show any signs of expanding at the desired rate of the Reserve Bank of Australia. GDP growth has hit decade lows, inflation is lacklustre, and unemployment is still above target levels. Even the positive trade data from the second and third quarters is already starting to fade, with October’s trade balance dropping to its lowest level in 10 months.

Furthermore, personal income tax cuts are not having the effect that the government had anticipated. This means we may have to wait until next year’s Federal Budget at the earliest before any additional stimulatory policies are introduced, or for any amendments to optimise the income tax cut program currently staged out until July 2022.

With the cooling state of the economy, even if further stimulatory measures are implemented next year, it is likely that it would be some time before these manifest through an economic upturn. This ultimately supports further monetary easing.

Dovish central bank policy

Although interest rates have dropped several times this year, it is looking increasingly likely that the RBA may continue its easing bias into 2020. The prospect of one rate cut is very high, while a second one by the middle of next year is also a probable outcome at this stage. These efforts would help the RBA restrain the AUD to stimulate exports and kick-start the economy.

The prospect of quantitative easing (QE) is also something that could come into the equation and potentially weigh on the Aussie dollar. In its November Board meeting minutes, the RBA noted that the effectiveness of interest rate cuts may differ at these levels compared with historically higher levels. RBA Governor Philip Lowe has tabled that QE could become an option if the cash rate reached 0.25% and data were moving away from employment and inflation targets.

Meanwhile, the US economy is showing more signs of resilience and robustness, particularly the booming jobs market. In last week’s Board meeting, the Federal Reserve hinted at a steady outlook for interest rates into 2020, not only suggesting they remain confident in the US economy, but also supporting the strength of the USD. While next year’s rate decisions will still be driven heavily by data coming through, corporate tax cuts and this year’s interest rate cuts should provide sufficient economic stimulus.

Heightened trade volatility and political influence

The Australian dollar has come under pressure in recent times due to growth concerns stemming from the ongoing trade spat between the US and China. Last week’s interim trade deal paves the way for a couple of permutations that may influence the AUD/USD currency exchange rate in 2020.