FYI | Feb 27 2008
By Chris Shaw
With the Reserve Bank of Australia (RBA) widely tipped to lift official interest rates again when it meets next week ANZ Bank senior currency strategist Tony Morriss suggests there is little downside risk for the Australian dollar between now and the meeting.
Part of the currency’s recent strength reflects a better market working of rate differentials, which Morriss suggests is a reflection of some new found stability in the US financial sector and a modest improvement in the market’s attitude to risk, though he questions how long this new found improvement will last.
Once the RBA meeting is out of the way Morriss sees scope for it to become a little more difficult for the Australian dollar to post gains against the US dollar, as he notes there are now signs emerging in the market of a slowing in momentum in terms of the widening of the spread between Aussie and US bonds.
While this doesn’t mean further gains can be ruled out, and a move to around 94c remains on the cards on a 3-month view in his estimate, it does suggest there is not enough momentum in the market for the currency to challenge parity in coming months.
As well, recent gains on cross rates have effectively tightened financial conditions in Australia, which Norris notes is making export conditions more difficult for those sectors of the economy not enjoying a boost from higher commodity prices.
The view conditions are tightening is gaining traction in surveys of consumers and businesses across Australia and if this continues it could limit the argument for further increases in rates going forward, which would in turn limit the upside momentum the currency currently enjoys.
As a result Norriss expects the Aussie/US dollar cross will peak around the middle of the year at US94c, before weakening gradually to around US90c by year’s end. He also anticipates a similar trend in the euro/US dollar rate, with a peak of around 1.50 by June before a decline in the euro to levels around 1.42 by the end of the year.
For the Australian dollar against the New Zealand dollar he suggests in the shorter-term market rate differentials remain in the Kiwi curency’s favour but in the medium-term commodity price gains should provide greater support for the Aussie dollar in the face of slower global growth. The failure to hold the move above 1.15 last week suggests short-term there could be a correction back to around 1.1300-1.1330, but medium-term a test of resistance at 1.16 appears likely.
The Aussie has been testing resistance against the yen in recent sessions and Morriss suggests a break through the upper end of this band at around 101.5 would signal a move to 104, while further bad news from the global financial sector could see a correction down to support levels at 96 yen, then at 93 yen.
