FYI | Feb 29 2008
By Chris Shaw
The Australian dollar is now at a 25-year high against the US dollar having traded this week as high as US94.98c and currently settling at close to US94.50c, but according to TD Securities senior strategist Joshua Williamson there remain further gains ahead for the currency.
Interest rates are an obvious supporting element, particularly as the Reserve Bank of Australia (RBA) is widely expected to lift official rates again when it meets next week. From a current interest rate differential of about 400 basis points Williamson suggests the spread could blow out to as much as 500 basis points in coming months as the US Federal Reserve has singled further cuts to US rates are likely as it deals with its economic slowdown, while the growth outlook in Australia remains decidely positive.
Sentiment should help this trend in coming months as well, as the outlook in the US is to date showing few signs of improvement and this should ensure further weakness in the US dollar. At the same time inflationary pressures remain elevated in Australia and this is likely to force the RBA into further action in terms of tightening monetary policy, which will support the Australian dollar.
While higher rates may restrict consumption Williamson suggests this should be offset by the improving outlook for the rural sector, which along with rising export volumes should allow the economy to rebalance to some extent and so support growth at around 3.5% through to the end of 2009.
Also supportive is the recent surge in commodity prices, which is boosting Australia’s terms of trade as demand from China, India and Korea in particular for Australia’s natural resources remains strong. As this keeps upward pressure on commodity prices the Aussie dollar should continue to benefit in Williamson’s view.
The often-quoted problem of Australia’s current account deficit is also unlikely to be a drag on the currency, he believes, as the nation remains in a good position to service its debt, particularly as in terms of the deficit due to current consumption Australia’s position is far healthier than that of other debtor nations, especially the US.
FInally, Williamson suggests if Australian interest rates move higher there is a good chance the Aussie dollar replaces its Kiwi counterpart as the Asian currency of choice for yield-seeking investors, which would also keep the currency at elevated levels.
TD Securities suggests the Aussie dollar could, in the absence of any further credit market issues, reach parity against the US dollar in the next six months, while it is targeting US98c by the end of the June quarter and US102c by year’s end. As a result Williamson continues to suggest a “buying the dips” approach.
