FYI | Apr 17 2007
By Chris Shaw
The Australian dollar continues to climb against the US dollar, extending its gains of recent weeks to be trading at more than 83.2c this morning. There seems little to stop it going higher in the short-term, GSJB Were noting the currency is benefiting from a rebound in the global appetite for risk after the equity correction of late February as well as ongoing solid economic performance both globally and domestically.
Also supporting the currency in the broker’s view is the recent recovery in industrial metals demand, as well as higher forecasts for coal and iron ore prices and stronger prices for rural commodities.
Macquarie adds the impact of private equity acquisitions of Australian companies to the list of supportive factors, noting most deals have at least some overseas component in terms of the parties involved and so the buyers are required to purchase the local currency to finalise the settlement of their takeovers.
The broker suggests momentum is clearly behind the currency, evidenced by an increase in long positions taken by traders on the Chicago Board of Trade. While this leads it to caution there is potential it overshoots in the short-term, there are some fundamentals supporting a stronger Aussie dollar.
These include the potential for interest rates to be pushed higher, which would further strengthen the interest rate differential between Australia and the US as well as nations such as Japan. This means the carry trade should continue to gain support, meaning the amount of money flowing into the domestic currency is unlikely to stop in the short-term.
ANZ Bank’s technical analysis of the currency suggests a move through 84c against the greenback is likely, at which point it would meet strong resistance. Any break through this key resistance at US84-85c should spark further upside in the bank’s view, with the potential for the 1989 high of US89c to be tested.
ANZ too notes the current interest rate differential between Australia and the US, pointing out this and the economic momentum in Australia stemming from the domestic commodity assets should see the currency stay above 80c against the US dollar for some time.
The bank is forecasting an exchange rate against the US dollar of 81c by the end of June, 78c by the end of September and 75c by March 2008. GSJB Were has revised its forecasts on the bank of the recent gains, the broker now estimating rates of 80c, 78c and 76c respectively on a three, six and 12-month basis, up from 76c, 76c and 74c previously.
Macquarie has lifted its long-term forecast to 75c from 72c previously, while expecting a rate as at the end of June of 82c, the end of September of 80c and the end of March next year of 79c.