Currencies | Sep 23 2009
By Chris Shaw
With the US dollar sliding faster in recent weeks than it had expected, National Australia Bank has revised its currency forecasts with the major change being a significant upgrade to its outlook for the Australian dollar. The change reflects the bank’s view the global economic recovery appears stronger than previously factored into its numbers.
While the bank notes the market is now pricing in less tightening by the Reserve Bank of Australia (RBA) than is its own forecast, the fact the US dollar is looking “sicker” than it had expected justifies the changes, which see its estimate for the AUD/USD by year’s end increase to US89c from US86c previously.
The peak in the AUD/USD rate is now expected to be US93c sometime in 2010, up from the bank’s previous forecast of a peak of US90c. This high is most likely to occur in the final quarter of next year in NAB’s view, as it expects a rate of US91c by mid-2010, up from US88c previously.
The bank’s forecasts for other currencies have similarly increased, with its New Zealand dollar estimates against the greenback being lifted to US72c for the December quarter this year against US69c previously, for the June quarter next year to US74c from US70c and for the December quarter to US75c from US71c previously.
Euro/US dollar estimates have also been adjusted, the bank now expecting rates of US$1.40 at year’s end against US$1.41 previously, US$1.44 in the second quarter next year and US$1.45 in the fourth quarter, compared to US$1.40 for both previously. Against the yen the bank is now forecasting a USD/JPY rate of 96 yen by the end of the year, 103 yen by the end of next June and 105 yen by the end of 2010, which compares to its previous estimates of 100 yen, 104 yen and 108 yen respectively.
More significant changes have been made to the bank’s pound sterling forecasts as it now expects the end of the year to see a GBP/USD rate of US$1.59 against US$1.75 previously, while next June it now expects a rate of US$1.68 against US$1.77 previously and at the end of next year of US$1.70, again from US$1.77 previously.
Currency specialists at Commonwealth Bank believe they have found one extra reason why the Australian and New Zealand dollars should remain supported shorter-term; the level of activity in the uridashi bond market. This is a bond denominated in a foreign currency and sold directly to Japanese household investors as a way of taking advantage of the higher interest rates on offer in other countries.
The official interest rate in Japan is currently 0.10% while the RBA’s official cash rate is 3%, so that’s a no-brainer, really.
As Commonwealth Bank notes, October is typically a strong month for new issuances of Australian dollar denominated uridashi bonds and the outlook for these issues has improved over the month as the global economic outlook has also improved, which is bringing higher risk assets back into fashion at the same time as the RBA is getting closer to lifting official interest rates.
Already Australian interest rates are among the highest in the industrialised world, with the spread between rates in Japan and Australia attractive at 2.9%, a spread expected to widen by the end of the year assuming the RBA hikes in coming months, as widely expected.
Adding to the attraction of Australian dollar uridashi bonds is the fact equity markets have also risen, which supports the view investors are prepared to take on more risk. This also implies greater interest in carry trade investments, especially given Japanese consumer confidence has stabilised around 50% above its lows, the improvement in confidence being expected to flow through to higher demand for uridashis.
To reflect this and the fact benefiting from currency movements is an important point of attraction for investors in such bonds, Commonwealth Bank is now forecasting 25% appreciation in the Australian dollar against the Japanese yen over the coming year, its forecasts calling for a rate of 85.26 yen as at the end of December, 93.45 yen as at the end of March next year, 98.28 yen at the end of June and 97.44 at the end of next September against a rate of around 79.5 now.
The bank notes the New Zealand dollar uridashi market should also benefit as the NZD similarly becomes more attractive given lower volatility in markets of late and higher equity prices, while the next move from the Reserve Bank of New Zealand (RBNZ) is also likely to be up, coming as early as the second quarter of 2010 in the bank’s view.
In total Commonwealth Bank notes the market is factoring in as much a 126-basis points in rate hikes by the RBNZ over the next 12 months, which it suggests would further encourage investment in NZ dollar uridashis. Factoring all this in the bank expects the New Zealand dollar will appreciate by 27% against the yen over the next year. Its forecasts stand at 68.60 yen as at the end of December, 75.6 yen at the end of next March, 79.92 yen at the end of next June and 80.64 yen at the end of next September against a current rate of around 65.63 yen.
In terms of upcoming maturities the bank notes there is a $400 million Australian dollar issue maturing on September 30 and it suggests the AUD/Yen rate may recieve some support around this time, while $1.2 billion of such bonds will mature in late October. In New Zealand an issue of NZ$300 million matures in late October and it suggests this could impact on the NZD/Yen rate around that time.
