The rand to dollar Forecast is an attempt to make sense of global economics and its prospects in the future. This is an interesting piece. The author has some interesting things to say about the future of economies and especially the economies of East and West. The author starts by saying that he is not an economic adviser but rather a writer who give his own opinion. I agree with him in general and particularly with his comments on the prospects for the United States in the coming decade.
The main thrust of his article is his view that the United States will continue to run a trade deficit. He further states that he thinks this forecast is correct through the end of the current decade. In making his forecast he goes through a number of indicators. Among these he highlights six key indicators which are falling oil prices, falling commodity prices, rising inflation, falling trade deficit and falling US Treasury Bonds. He then makes a broad assumption regarding what all of these indicators would look like in the next ten years. Once this assumption is made he can then make his forecast.
If his forecast is correct then the current scenario whereby the United States runs a large trade deficit is not going to change in the foreseeable future. He further goes on to state that he does not see the trade deficit increasing significantly over the next ten years. However, if his forecast is wrong and the US begins to run a large current account deficit then this would have a significant negative impact on the US economy. There would certainly be pressures put on the dollar as a result. The rise in commodity prices would mean that there will be pressure on the dollar to weaken against all of the currencies that are derived from these commodities.
Another aspect of his outlook which I take up in my hand to dollar forecast is his assumption that the US economy will continue on its current path of slow growth. He also notes that there will be no change in the composition of wealth in America. This means that there will be no pressure put on the American dollar to weaken against other currencies. This is based on the assumption that the American economy will maintain its present level of employment. He further notes that the slow growth rate will be sustained over the medium term as there are no sudden changes in the rate of inflation. This means that inflation will remain relatively low at around three percent and the trade deficit will remain small.
One more element of his outlook which I will discuss is his assumption that the federal budget will be balanced by 2021. As I write this article there are reports of a budget surplus in the US and evidence that the budget is being balanced. So my assumption is that the rand will be weaker against the dollar if the forecasts of Mr Rajan are true. This is based on the assumption that there will not be a major economic recession.
The rand to the dollar forecast for the coming decade and beyond is also based on the assumption that there will be no significant change in the US export sector. export growth is a key driver of the strength of the Australian economy. There is a strong correlation between the dollar forecast and export growth. If the export outlook worsens and the dollar do not weaken against the Australian Dollar this could negatively affect Australian exports.
My views of the direction of the Australian economy are informed by the fact that the current commodity boom will last at least until the end of the year. In November, the Reserve Bank of Australia (RBA) released a statement that indicated it may hike the base rate again after reviewing the outlook for global markets. Markets around the world are awaiting the arrival of the US Federal Reserve (US Fed) in its final rate decisions. Should US rates rise, it is expected that Australia will take a hit to its exports and lead the Global Commodity Index down. However, the rand to the dollar forecast indicates that Australia should do whatever is necessary to maintain solid growth in the face of an increasing USD.
The July 2021 dollar forecast is based on the assumption that the US Fed will raise rates by up to 25 basis points and maintain them for the duration of this year. A continuation of this path is believed to cause weakness in emerging market currencies and provide room for the Australian dollar to appreciate. The direction of the Australian economy will also be affected if the Fed raises rates at a faster than expected pace. A strong Australian dollar will help retain the Aussie trade deficit and reduce imports, which is beneficial to the economy. A weaker Australian dollar is expected to have a negative impact on the United States economy through exports and imports.