FYI | Feb 27 2007
By Chris Shaw
As ANZ Banking Group notes, the past week has been a good one for the Australian dollar as the currency has benefited from positive news flow that included solid commodity prices and confirmation from the Reserve Bank of Australia (RBA) policy risks remain to the upside.
This has pushed the currency from a level of around 0.77 against the US dollar a couple of weeks ago to around 0.792 now, though from here the bank sees further upside as becoming more reliant on a weaker greenback than strength in the domestic currency.
This may yet come to pass, the bank pointing out the US dollar is looking more vulnerable at current levels as higher oil prices create some uncertainty in equity markets and there is potential for higher default levels in the US mortgage sector.
The uncertainty in the Middle East, where the Iranian nuclear issue appears to be gaining strength, is also a possible negative for the American currency in the bank’s view given the US role in Iraq and the current stand-off between the Republicans and Democrats in US politics.
While weakening in significance there remain some factors that will help determine the direction of the local currency, the bank noting the ongoing high level of corporate activity in the Australian economy should provide a boost given the likely inflow of funds, though this may take some time to materialise.
This should help short-term, but the bank still expects a lower Aussie dollar against the US by the end of the year, forecasting a rate of 0.73 for December.
In the meantime the Aussie dollar may weaken on the cross rates as a reflection of changes to interest rates in other economies. Europe is an example as the bank notes the European Central Bank is considered likely to increase interest rates when it meets next month and a further increase is expected before the end of the year.
Similarly the Bank of England it widely tipped to lift rates again in coming months, so the bank is forecasting a weakening against both currencies over the course of the year. From current levels of around 0.60 against the euro and 0.40 against the pound, the bank year’s end forecasts are 0.57 and 0.39 respectively.
Japan has already moved to lift its official interest rate by 0.25%, but the bank points out the significant interest rate differential remaining between the Japanese and Australian economies should ensure the carry trade remains in place. ANZ is forecasting a AUD/yen rate of 80.3 by the end of this year, down from the current level of 95.77 as while only one further rate hike is forecast this year, ongoing strength in the Japanese economy could result in further action.