Currencies | Mar 25 2013
-Oz dollar potential for weakness
-US dollar's recent strength may ebb
-Euro still facing major risks
-Japanese yen slide could be stemmed
By Eva Brocklehurst
The market has priced out any further reduction in Australia's official cash rate but some analysts believe this is premature. CIBC World Markets is one. Reviewing the Australian dollar has CIBC favouring a cheaper currency. In fact the analysts calculate fair value for AUD/USD at around 96 US cents and expect a move towards this level for the Aussie by the September quarter.
The analysts note that labour market resilience has been the major factor supporting a floor at the current level, 3%, in the Reserve Bank's cash rate. Any softening in the labour market that stems from pressure on the resources and commodities sector, as well a reduction in government spending, provides the negative bias. For now, the analysts find the AUD/USD is being sustained by the uptrend in AUD/JPY, which has moved more than 20% in the last few months. This predicates a move lower in AUD/USD should the momentum subside in AUD/JPY. The analysts expect the Australian dollar's yield advantage will narrow and cash rates are likely headed to all time lows of 2.5%. The view is that economic impetus could fade, dampened by commodity price influences and the government's resource rent shortfall.
The US dollar's recent rally has been underpinned by a firmer economic outlook and the potential for disappointment with growth elsewhere, particularly in Europe. CIBC, nonetheless, believes that US dollar support could ebb later in the year when the US economy becomes subject to the full US$85 billion in sequestration cuts. This is expected to peg back 2013 growth and undermine the US dollar's strength.
The Chinese renminbi remains stable despite some increasing volatility in global markets during recent weeks, CIBC notes. Stability is expected to be maintained against the US dollar and further gains recorded on a trade-weighted basis. The analysts' measure of the trade-weighted renminbi has it appreciating around 2.5% for the year to date. CIBC finds business as usual in China is the theme and a modestly firmer currency will aid the policy mix and curb any inflation pressure.
The year started off with a rally in the euro but that is fading away. CIBC believes that, even though eurozone break-up risks are negligible, political headwinds have returned in the guise of an inconclusive Italian election result and Cyprus debt problems. The analysts believe the talk around the handling of Cyprus' debt appears to be putting savers at risk and that could undermine confidence in other European banks. Many of the risks across the region could weigh further on the euro in the near term, and CIBC targets a US$1.25 level against the euro in six months.
In the short term CIBC has a bearish view on the British pound. Following the ratings downgrade by Moody's the analysts believe there is a chance other rating agencies will follow suit, and strip the UK of its AAA rating. This could happen after the government hands down the budget, if that shows deficit targets are not being met. CIBC advises those looking for value in sterling that they'll have to be patient.
Finally, the yen has depreciated almost 15% against the US dollar in just four months. CIBC thinks that an advance in USD/JPY to 95 yen may be the easier bit and 100 yen will be a sticking point. That is, unless the spreads in Japanese government bonds to US Treasuries widen aggressively. The analysts believe further aggressive weakening of the currency is not politically palatable. CIBC is not inclined to be that short the yen at current levels.
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