An end to commodity price gains, a likely US interest rate hike in December and the risk of another RBA rate cut all point to a dip in the Australian dollar below 70 US cents in 2017, says AMP Capital.
Multiple pressures are likely to drive the Australian dollar below 70 US cents in 2017, says AMP Capital economist Diana Mousina.
The Australian dollar was valued at 74.6 US cents on Friday. But AMP Capital continues to believe the local currency will head below the 70 cents mark in the new year, said Ms Mousina.
"Recent commodity price gains are not likely to continue, [US Federal Reserve] rate hikes will lift the US dollar, there is still the risk of another RBA interest rate cut (which the market is not currently pricing)," she said.
Inflation is likely to take longer to return to the RBA's target band of 2-3 per cent than current forecasts assume, Ms Mousina said – mostly due to the spare capacity in the labour market.
"Coupled with softer domestic data recently and a slowing in dwelling prices, this will give the RBA the room it needs to cut interest rates during the first half of 2017," she said.
A lower Australian dollar will be helpful to the economy insofar as it will assist the recovery in non-mining investment, said Ms Mousina.
The prospect of a sub-70 cents Australian dollar means investors should maintain a decent exposure to unhedged global assets, she said.