Currencies | Sep 04 2009
By Chris Shaw
Given the speed with which the Australian dollar has appreciated in recent weeks the Commonwealth Bank’s year-end target of US84c has alerady been achieved, leading the bank’s chief currency strategist Richard Grace to bring forward his forecasts for the currency by a quarter.
This means the Aussie dollar is now expected to end the year at US87c, a level previously forecast to be achieved only by the end of March next year. The changes flow through to subsequent periods as well, with Grace now forecasting a rate of US89c by the end of March next year and US91c by the end of the June quarter, which compare to his previous forecasts of US87c and US89c respectively.
As at the end of September 2010 Grace expects an Australian dollar rate of US87c, which is unchanged from his previous view.
The changes reflect in large part Australia’s better relative economic health, which has seen 2-year bond yields rise well above equivalent yields in the US market. The spread between the two is now around 350 basis points, up from a low of 190 basis points in March of this year.
Grace sees little chance of the spread narrowing in coming months given the Reserve Bank of Australia appears poised to begin lifting rates by the first quarter of next year, although he notes the risk is an increase comes before the end of the current calendar year.
Some improvement in the global economy has also been supportive for the Aussie dollar given a positive impact on commodity prices, while Australia’s ability to continue lifting exports has also played a role in this regard according to Grace.
At the same time, the US dollar has depreciated and Grace expects this trend will continue given deflation is eroding the attractiveness of US assets, meaning net portfolio flows are not enough to fund the American current account deficit.
As well, Grace expects interest rates in the US will be kept low for an extended period as the economy tries to recover and in such an environment short-end nominal yields will also remain low. Such an outcome would discourage US dollar appreciation in his view.
It isn’t until the fourth quarter of next year US interest rates are predicted to rise, so Grace doesn’t see the US dollar as gaining much support before the September quarter of next year, when the market is likely to start pricing in the rate change. At that time he sees all currencies easing against the US dollar.
Along with changes to forecasts for the Aussie dollar against the greenback, Grace has adjusted his estimates for the AUD against the New Zealand currency as well. Having previously forecast AUD/NZD rates of 1.2403 for the end of September and 1.20 for the end of the year, Grace is now forecasting rates of 1.2537 and 1.2429 respectively.
Forecasts for subsequent quarters have also been adjusted such that his estimates now stand at 1.2361 at the end of March next year, 1.2297 at the end of June and 1.2083 at the end of September compared to previous forecasts of 1.1918, 1.1867 and 1.1918 respectively.
