FYI | Oct 02 2007
By Chris Shaw
The Australian dollar was one of the currencies hit hardest when credit markets went into correction mode in July and August but it has enjoyed a strong recovery in recent weeks as the market’s appetite towards risk has changed.
According to TD Securities global strategist Stephen Koukoulas there are likely to be further gains in the Aussie dollar in the coming weeks and months, with parity and beyond against the US dollar not unreasonable outcomes on a 12-month timeframe.
There are a number of factors behind his view, the first being the recent improvement in commodity prices. This is supportive for the Australian dollar given the structure of the Australian economy and the fact higher commodity prices will produce an improvement in the country’s terms of trade.
As Koukoulas notes, even though the dollar has risen strongly from long-term lows of around 50c against the US dollar in recent years it has actually lagged the improvement in the terms of trade, as a literal interpretation of the relationship between the two suggests an Australian dollar of between 1.10-1.20 against the US is possible.
Also supportive is the relative strength of the two economies, as growth in Australia remains strong and on TD Securities figures should remain above 4.0% through 2008, while the US economy is clearly finding the going more difficult at the current time.
This is also supportive as it increases the likelihood of a widening in the interest rate differential between the two countries as there is scope for the Reserve Bank of Australia (RBA) to lift interest rates further to fight inflation while the Federal Reserve in the US is more likely to lower rates further.
It is a view shared by Teis Knuthsen, chief strategist at Danske Bank, who makes the point as long as the global economy outperforms the US economy and the US is alone in cutting interest rates, the US dollar will be under pressure.
Such an outcome he sees as likely, as the Danske Bank view is the Fed will cut again before the year is out while the European Central Bank (ECB) will remain on hold and the Bank of Japan (BoJ) will increase rates in December.
This means it won’t only be the Australian dollar that gains against the US currency, as Danske expects the euro to trade as high as 1.45 in the short-term, up from its previous estimate of 1.40. Longer-term Knuthsen doesn’t see the US dollar weakness as sustainable though, as on a 12-month view he expects a euro rate of around 1.35.
Knuthsen is not as positive on the Aussie dollar as is Koukoulas, suggesting the AUD’s outlook is relatively flat in the short-term with the currency expected to stay at around US$88c on a 1-month basis. On a 12-month basis Knuthsen expects the greenback to also strengthen against the Aussie and is forecasting 82c by this time next year on the basis the currency is significantly overvalued at current levels.
