Currencies | Sep 22 2009
By Chris Shaw
The Australian dollar has appreciated significantly against the US dollar in recent weeks, driven by higher commodity prices and the better performance of the Australian economy, which has seen some in the market begin to factor in imminent increases to interest rates by the Reserve Bank of Australia (RBA).
But according to National Australia Bank the currency is not overvalued relative to the greenback even though it remains at one-year highs according to its weekly fair value estimate model, which at present implies a fair value band of US81-87.9c. The currency closed on Tuesday at US86.3c, putting it just 2% above the mid-point of the fair value band at US84.5c.
In the bank’s view the currency would be expensive if it traded more than 5% above this mid-point, implying there is still scope for additional gains. Having said that NAB suggests last week’s peak of US87.75c may be tough to breach in the near-term, particularly if equity markets again become shaky.
This is possible in the bank’s view because it notes there are rising fears economic policymakers around the world make an earlier than expected withdrawal of fiscal and monetary stimulus measures, which is increasingly seen as possible given the global economy appears to be recovering.
Even if this were to happen, NAB doesn’t expect any significant correction in equity markets and this makes any corresponding fall in the Aussie dollar unlikely, especially while there remains mounting evidence of a recovery in the global economy.
But CIBC World Markets is somewhat more cautious, taking the view while a number of currencies have largely mimicked the performance of equity markets in recent months in rallying strongly, such currency appreciation cannot last forever and at some point this correlation will have to break.
There are signs this may already be underway as despite the most recent solid gains in stock prices the Canadian dollar has largely traded sideways. In the group’s view this has potential implications for the Australian dollar as well given both are regarded as commodity currencies.
AS CIBC points out, the most recent data on the Australian economy suggest the 2.4% growth in annualised terms achieved in the second quarter is unlikely to be repeated in the September quarter, reflecting the weakening outlook for the labour market and the impact this is having on household incomes.
As well, CIBC notes some signs the Australian housing market is losing some of its recent steam, while the export sector also appears to be weakening somewhat. Factoring all this in suggests a tepid growth outlook, one the group sees as enough to delay currently expected increases in interest rates, which should in turn weigh on the currency to some extent.
Another currency to perform strongly as equity markets have risen has been the New Zealand dollar, the currency gaining more than 40% against the US dollar and more than 25% on a trade-weighted index basis since March.
Macquarie suggests while improving economic data and higher commodity prices have been supportive, it has been stronger investor appetite for higher-risk currencies that has been responsible for much of the gains. This trend also explains why the Kiwi dollar has outperformed the Aussie dollar since the middle of the year.
Looking forward Macquarie suggests the risks to the Kiwi currency are evenly balanced, the downside reflecting ongoing concerns given New Zealand’s large current account deficit and the fact the recent gains in the currency don’t appear to be driven by any relative improvement in the country’s economic conditions.
On the plus side of the ledger Macqurie suggests the factors that have driven the currency higher remain in place as equity markets should continue to gain and the outlook for commodity prices remains positive. This suggests the Kiwi dollar should continue to gain against the US dollar in coming months, hitting US70c by the end of the year on the broker’s numbers.
From there the broker expects the currency should ease as the US begins to hike interest rates in the second quarter of next year, forecasting a rate of US67c by the middle of 2010. Against the Aussie dollar the broker sees the New Zealand currency as remaining relatively flat over the same period.
