Currencies | Feb 15 2010
By Rudi Filapek-Vandyck
Economists and stockbrokers are busily re-writing their scenarios for the Australian dollar this year. The latest to do so, the global markets research team at Commonwealth Bank is now firmly acknowledging the risks are now in favourr of the US dollar becoming stronger than previously anticipated this year, while the Australian dollar might weaken further. Under such a scenario Australian consumers would be hit through higher import costs and higher price inflation.
The case for a stronger greenback is supported by increased odds the US Federal Reserve will embark on a tightening path from late 2010 onwards. CommBank economists are currently of the view that US growth is likely to surprise to the upside and this is offsetting disappointing growth in Europe. Probably the most important element in this scenario is that global growth will continue recovering.
The economists believe the US economy will continue generating strong data in the quarters ahead and this will put upward pressure on US bond yields and on the US dollar. On their revised projections, the AUD will not be trading higher than US88c by mid-year, with the Aussie expected to finish the year at US85c, suggesting we have seen the peak in both USD weakness and in AUD strength.
By March next year, the Aussie is expected to trade around US82c. Note the AUD/EUR cross is anticipated to remain around 62-64 throughout the next twelve months.
The RBS cash rate is expected to rise to 4.25% by mid-year, and to 5% by year end.
Meanwhile, currency specialists at National Australia Bank note the Aussie dollar continues to trade very much in line with overall risk appetite, and thus on Friday the pressure was once again to the downside as China announced more tightening measures and with European growth disappointing. The Greece factor has remained alive as well.
NAB-economists also point out the IMF has released a report which could potentially have serious ramifications for global bond markets. In this report, which was co-authored by the IMF’s Chief Economist, it was argued that conventional macroeconomic management needs a re-think after the GFC. One of the recommendations in the report is that central banks target an inflation rate nearer 4%, rather than the present 2%, as this would “increase the room for monetary policy to react to such shocks”.
NAB points out that owners of nominal bonds will hope this recommendation finds its way to the bin but, on the other hand, the economists argue it must surely be tempting for governments with large debts and no real political appetite to cut the deficit to use this kind of thinking as cover to sneak through a bit more inflation?
