Australia | Aug 11 2006
By Chris Shaw
Prior to this week’s decision by the US Federal Reserve to hold interest rates steady, expectations had been any pause in the rate hike cycle would be decidedly bearish for the US dollar. Things didn’t quite work out that way though, as the greenback was largely unchanged after the meeting and has since moved more in response to other global issues.
This of course has implications for the Australian dollar, which over the past two years has been held within a trading range of US$68-US$0.80. ANZ Bank suggests nothing has changed enough to move the currency outside of this band, though some swings within this band are likely.
The bank suggests the Aussie dollar should move higher in coming months, possibly testing US$0.78 in a delayed response to the US decision to leave its rates unchanged, while also reflecting some catch-up interest rate increases in Australia. ABN Amro agrees, noting the strong employment numbers released yesterday are likely to be supportive for the currency in the short-term.
Following the latest rate increase the interest rate differential between Australia and the US is 0.98% based on the yields on two-year bonds. Commonwealth Bank suggests any sustained move to a spread of more than 1.0% would be bullish for the Australian dollar, so it sees the local currency hitting 0.79 against the greenback by the end of the year.
This would be a good selling point in ANZ’s view, as it sees the local currency then weakening to closer to US$0.70 by March next year, which would reflect its expectations of an easing in commodity prices and the impact of a jump in Uridashi (Australian dollar denominated bonds) maturities, which is likely to see money flowing out of the currency.
This impact is likely to be more broadly based, as the broker anticipates the Aussie dollar hitting cyclical lows against both the Euro and Yen as well. Emphasising this, the bank is forecasting the AUD/Euro rate to hit 0.53 in the March quarter next year against 0.60 now, while it sees the Yen improving to around 72 in the same period from 88.5 now.
This could then prove to be another low within the trading rage, as the bank suggests the likelihood of solid global growth extending into 2008 is increasing as stronger growth from Europe should help offset any slowing in the US. As a result, it expects the Australian dollar to again gain support, with its forecast for a recovery in the currency to US$0.76 by the middle of 2008.