Currencies | Sep 16 2009
By Chris Shaw
Recent data support the view the global economic recovery is continuing and Danske Bank notes bodies such as the OECD and International Monetary Fund (IMF) are revising up their growth estimates after accepting their previous forecasts were simply too pessimistic.
Reasons for recovery include improving housing and auto sectors in the US, while gains in forward looking indicators have increased the bank’s confidence in a strong initial recovery. As well, its longer-term research suggests being optimistic on the sustainability of the recovery appears correct, meaning 2010 is more and more looking like a year when the global economy makes up some lost ground.
But what does this mean for currency markets and in particular the US dollar? Danske Bank has looked at the last expansionary cycle, which ran from August of 2005 until May of 2007 and found during the period counter-cyclical currencies underperformed as the yen lost close to 20% of its value and the US dollar declined by around 10%.
Such a scenario is expeted to again play out, with the bank expecting the euro to post further gains against the greenback in coming months. The technical picture supports this view, as does the fact investor sentiment towards the US budget situation is turning even more sour, especially given the bank’s own forecasts suggest government debt will rise at a faster rate than currently expected.
All up this leads Danske Bank to suggest the peak in the euro/US dollar rate has not yet been achieved and its forecasts reflect this as it has a 3-month forecast of 1.52, a 6-month forecast of 1.50 and a 12-month forecast of 1.45. These compare to its previous estimates of 1.45, 1.48 and 1.45 respectively, while the spot rate is currently 1.467. From a technical perspective, the analysts points out 1.604 is an eventual target, though on Danske Bank’s fundamental analysis the euro is currently 15-20% overvalued in purchasing power parity terms.
The yen has been the best performing G10 currency over the past month despite a continued decline in risk aversion on the part of investors, but given an outlook of fading financial distress and an economic recovery continuing to unfold, the bank expects the yen to underperform the greenback. Its forecasts call for a 3-month rate of 94 yen, a 6-month rate of 97 yen and a 12-month rate of 102 yen, which compares to a current spot rate of around 90 yen.
For the Australian dollar Danske Bank sees further gains against its US counterpart as Australia looks like being the first of the G10 nations to lift interest rates, while even allowing for this, economic growth in Australia should outperform that of the US. Also supportive for the Aussie dollar is the fact that potential for further improvement in the global growth outlook will add support to commodity prices, which would offer a positive boost to Australia’s terms of trade. Danske Bank is forecasting a rate in both three and six months of US90c, while its 12-month forecast is US86c. The spot rate is around US86.5c.
But while Danske Bank sees the Aussie currency gaining on the US dollar in coming months, Westpac sees the currency continuing to depreciate against the New Zealand dollar as it expects the Kiwi economy to benefit from relative improvement compared to Australia.
Back in May, the AUD/NZD rate came close to an eight-year high, Westpac noting the move reflected New Zealand interest rates falling faster than those in Australia, a greater fall in relevent commodity prices in New Zealand, low net migration numbers and significant GDP underperformance by the New Zealand economy.
But in the bank’s view a number of these factors have now swung back in New Zealand’s favour as growth is no longer underperforming by as wide a margin as was the case a few months ago, prices for New Zealand’s major commodities are now rising faster and net migration into New Zealand has picked up dramatically.
To reflect this, Westpac expects the AUD/NZD rate will continue depreciating towards 1.19 by the end of the year, with a further, smaller fall likely in 2010 that will bring the rate down towards its historic inflation-adjusted average of 1.172. This compares to a current spot rate of around 1.226.
