FYI | Jan 10 2008
By Chris Shaw
With the US economy struggling the US dollar has been weak of late, falling below 110 against the yen and allowing the euro to recently trade near record highs just below 1.50.
Surprisingly given its link to commodity prices and with interest rate differentials significantly in its favour the Australian dollar has not enjoyed the same strength against the greenback of late, which ANZ Bank senior currency strategist Tony Morriss suggests highlights the risk aversion of investors currently.
In Morriss’s view the global growth concerns driven by fears the US may enter a recession mean 2008 is likely to translate into a tougher year for the Australian dollar, even though US interest rates should be cut further at the same time as the Reserve Bank of Australia may continue to tighten.
Danske Bank supports this view and expects a further four cuts by the Fed at its next four meetings, bringing official interest rates in the US down to 3.25%.
Morriss expects the Australian dollar to gain in the first half of the year and his forecasts are for US91c by the end of March and US90c by the end of June, but over the course of the year the US90 level should be difficult to hold and he predicts the Aussie will slide back to around US86 by year’s end.
It isn’t only the greenback against which the Australian dollar may struggle, as both Morriss and Danske Bank see the currency underperforming against the yen and Chinese renminbi this year as well.
In the case of the yen Danske Bank expects negative returns from the currency trade, as its view is the yen will gain this year given it is the only G10 currency currently undervalued against USD and remains mis-priced relative to the euro.
Also supportive is the fact the Bank of Japan is expected to stay put on rates while other central banks cut rates on growth concerns, meaning relative rates should also be supportive for the yen.
Danske is forecasting a US dollar/yen rate of 100 within the next three months, which suggests significant further strength given the rate is currently around 109. Similar strong performance against the euro is also expected, with a rate of 150 forecast for sometime in the next six months, compared to around 161 currently.
In contrast ANZ Bank’s estimates for the US dollar/yen rate are for more subdued performance in the first half of the year and a rate of 108 as at the end of June, with the yen strengthening to 106 in the September quarter and 104 by the end of 2008.
Short-term Danske Bank expects the euro to set a new record against the US dollar as it predicts a move to around 1.52 this quarter, but with the European economy also likely to suffer on the back of a US slowdown and the European Central Bank tipped to cut rates twice this year the strength isn’t seen as lasting over the longer-term, the bank cutting its 12-month forecast for the euro to 1.40 from 1.45.
ANZ Bank is a little less aggressive with its euro forecasts, expecting rates of 1.49 this quarter, 1.50 in the June quarter and 1.42 by year end.
