Aussie Dollar Expectations Revised Lower

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By Chris Shaw

With the Reserve Bank of Australia (RBA) widely expected to lower interest rates at its meeting next month, the bounce ANZ Banking Group had expected in the Australian dollar after it fell almost 13c against the US dollar in the space of five weeks now appears unlikely to materialise, especially given the combination of a stronger greenback and weaker commodity prices.

According to the bank’s senior currency strategist Tony Morriss the US dollar strength has in part been a product of weakness elsewhere, as growth in both Europe and Japan has been lower than expected and this has put their respective currencies under pressure.

As well, the US dollar has gained support from an improvement in the US current account deficit, which is a consequence of the weak dollar of the past several years. While further gains against the euro are possible, Morriss points out this will likely require a narrowing of interest rate differentials between Europe and the US, something that doesn’t appear on the cards in the short-term given the existence of inflationary pressures in the European economy.

On Morriss’ estimates, 1.43-1.44 for the euro against the US dollar is now a key level and one that equates to 0.85 for the Aussie dollar against the greenback. He expects solid support for the currency around this level, while even stronger support is likely at closer to 0.82.

Helping provide support for the currency in the shorter-term are capital inflows. Morriss notes Chinalco has been granted approval to up its stake in Rio Tinto ((RIO)) and Japanese brewer Kirin is set to acquire Dairy Farmers.

Given such an outlook, Morriss expects some recovery in the Aussie dollar in the shorter-term, but on a more medium-term outlook, he has lowered his forecasts. While 0.92 is his target by the end of the September quarter, Morriss expects by the end of the year the Aussie will be around 0.90 against the US. Further weakness is expected in 2009, with 0.88 the target for the end of March and 0.85 the target for the end of June.

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