Currencies | May 11 2009
By Chris Shaw
The rally in global equity markets since early in March has also driven the Australian dollar higher, the currency posting a strong break-out against the US dollar above US$0.7300 and then running past the previous October’s high and key Fibonacci resistance at US$0.7450/80.
According to ANZ Banking Group head of foreign exchange and international economics research, Amy Auster, the move, combined with the Aussie dollar/euro cross moving above its 200-day moving average, means the gains in recent sessions are too strong to ignore and forecasts have therefore been adjusted accordingly.
In Auster’s view it also means the Australian economic outlook may be somewhat different to what has been the consensus view of the past six to nine months, with the market offering hints official interest rates may stop at 3.0% and that commodity prices could rise faster than previously expected.
To reflect the recent data, the bank has pushed out its timing for the next cut to rates from June to August, Auster estimating a trough at 3.0% for the cash rate against previous estimates of a 2.0% trough would be worth three to four cents against the US dollar.
It also means there is less chance now the Aussie currency hits a new low against the greenback in the current cycle, the bank now setting its trough at US$0.6400. On the upside the bank sees scope for the currency to run to US$0.7850 or even US$0.80 in the shorter-term, though it sees an increase in downside pressures over the second half of the year, so the recent run is likely not sustainable.
Westpac chief economist Bill Evans attributes the Australian currency’s gains primarily to an increase in global risk appetite as major asset markets have enjoyed a strong recovery.
But where he agrees with Auster is in the outlook for the currency as he shares her view the chances of the Oz dollar hitting new lows against its US counterpart are now seen as very slim as there are unlikely to be significant enough shocks in the global economy to drive such a reaction.
Similarly, Evans takes the view there are some existing pressures on the Aussie dollar that are likely to intensify in coming months, these including his view the Reserve Bank of Australia (RBA) has not yet finished cutting rates. While markets are now pricing in a relatively flat rate profile, a further 1.0% reduction in the cash rate over the course of the year remains likely in his view.
As well, Evans notes Australia’s net external liabilities are an issue for the currency, particularly with Budget deficits as a share of GDP likely to increase substantially in coming years as the Government attempts to deal with the current global economic downturn.
The other reason the currency’s gains against the US dollar may not be sustainable, according to Auster, is the potential for the latest round of US dollar weakness to prove temporary, as if the US economy is actually on the path to recovery the US Federal Reserve is likely to start tightening rates over the next 12 months. Such a move would likely return strength to the greenback at the expense of the Australian dollar.
Auster also points out if the US dollar is ahead of regions such as the European Union, the UK and Japan in terms of emerging from the global recession, this should prompt an inflow into US dollar assets, so providing additional support for that currency.
With this in mind, Auster is forecasting a rate of US$0.72 for the Aussie against the US dollar as at the end of June, before the AUD weakens to around US$0.68 by the end of September, US$0.66 by the end of 2009 and US$0.65 by the middle of next year. Evans is somewhat more bullish with his estimates, expecting the Aussie dollar/US dollar rate will be US$0.72 as at the end of June but US$0.70 by September 30, US$0.68 by year’s end and US$0.74 again by June of next year.
Similar to changes in the expected trading range for the Aussie dollar against the greenback, ANZ has lifted its ranges against other currencies as well, the top of its six month range against the euro increasing to 0.6100 euro from 0.5620 previously and for the yen to a peak of 86 from 80 previously.
In terms of actual forecasts the bank is expecting rates against the euro of 0.56 as at the end of both June and September, 0.55 at the end of December and 0.56 as at June 30 next year, while for the Aussie/yen ANZ is forecasting rates of 75.6, 73.4, 72.6 and 75.4 respectively for the same periods.
In contrast, Westpac’s forecasts for the Aussie/euro are 0.56, 0.55, 0.52 and 0.55 respectively for the end of June, September, December and June 2010, while for the Aussie/yen the bank is forecasting rates of 70, 65, 65 and 75 respectively.
