The current rise in the US dollar is likely to flatten in 2016, offering respite to Pacific currencies, according to ANZ economists Glenn Maguire and Eugin Lee.

The ANZ’s Glenn Maguire

The 2016–17 outlook seems to be a heady one for Pacific currencies, with global and regional developments likely to have an uneven impact, they write in the latest Pacific Insight.

‘We expect Pacific currencies to face another challenging year in 2016, as our Foreign Exchange strategists forecast further broad-based weakness against the USD.

‘While the weakness in Pacific currencies will come to an end at some point, we do not believe we are there yet.

‘The USD’s ascent has likely passed its most acute trajectory,’ they conclude, adding the US economy is slowing because of the USD’s recent rise and a weakening global environment.

Looking ahead, they note two distinct trends that are likely to affect the Pacific economic backdrop.

‘While the weakness in Pacific currencies will come to an end at some point, we do not believe we are there yet.’

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Firstly, the global backdrop will be particularly uneven, indicating specific country and trade exposures will be more important in determining exchange rates.

Secondly, the collapse in commodity prices and a recovery in developed economies suggest the differential between the economies of the Pacific Islands and their currency performance should narrow in 2016–17.

Australian dollar

After a fall of 11% against the US dollar in 2015, the Australian dollar has fallen 5% so far this year, but it is still overvalued by around 7 cents, say Maguire and Lee.

‘Over the next month, global market gyrations may continue to set the tone for the AUD rather than underlying fundamentals, especially since commodity prices and the stability of Chinese assets, two key forces influencing the Australian economy and its currency, are at the epicentre of the current market volatility.

‘Commodity prices and the stability of Chinese assets […] are at the epicentre of the current market volatility.’

‘In a market with heightened volatility, elevated policy uncertainty and tightening liquidity via declining reserves, the AUD could continue its retreat.’

They say Australia’s domestic economy has performed ‘relatively well’, despite oil price falls, because the price of iron ore has been relatively stable around USD40/tonne.

NZ dollar

Maguire and Lee predict markets will be ‘cautious’ about the NZ dollar, and if the global environment deteriorates further, it will have a strong impact on the NZ economy, which may be offset by a decline in the value of the NZD.