Currencies | Feb 09 2010
By Chris Shaw
In October of last year National Australia Bank began forecasting parity for the Australian dollar against the US dollar by the end of the March quarter. With the Reserve Bank of Australia (RBA) not lifting interest rates at its meeting last week, NAB economists have now adjusted their timing, still expecting the Aussie currency will hit par against the greenback.
In making the parity forecast last year the bank’s head of currency strategy John Kyriakopoulos had expected the RBA to lift rates by 0.25% twice in the March quarter but last week’s non-decision means this is now not going to happen, as further hikes appears unlikely prior to May in his view.
The other assumptions underpinning his forecast was the bank’s risk-appetite index would rise well above the long-term average of 50% as the global economy continued to recover at the same time as an easing of the global credit crunch.
But with China now clamping down on excess credit growth and EU members such as Greece, Portugal and Spain at a growing risk of sovereign credit defaults, Kyriakopoulos notes global risk appetite has fallen sharply, the bank’s index declining from better than 70% in mid January to 47% now.
This has impacted the bank’s fair value model for the Australian dollar against the greenback, as Kyriakopoulos estimates US4.5c of the Aussie dollar fall from around US94c to US86 can be attributed to the fall in global investor risk appetite. Weaker metals prices equate to US1.9c of the decline, while reduced RBA rate increase expectations explain a further US0.9c.
With it now looking unlikely parity between the two currencies can be achieved in coming weeks, Kyriakopoulos has lowered his estimate for the end of the March quarter to US90c from US100c previously, while his forecast for the end of the June quarter falls to US100c from US102c previously.
By the end of September he also expects a rate of US100c, down from US103c previously, while at the end of the year Kyriakopoulos sees the Aussie dollar trading at US97c, down from US100c previously.
To put this in context, Westpac chief economist Bill Evans has also adjusted his estimates for the Australian dollar against the US dollar, now estimating a rate of US86c by the end of March and US85c by the end of June, the latter being revised down from US90c previously. There is no change to Evans’s year end forecast of US95c.
While the timing of rate increases has changed, NAB’s Kyriakopoulos still expects the RBA will hike rates by a total of 100 basis points this year, moves he expects will be supportive for the Australian currency. Also likely to offer support in his view, is the expectation global GDP returns to trend levels, his forecasts calling for growth of 3.5% in 2010 and 3.9% in 2011.
This should put upward pressure on commodity prices, with related positive implications for the Australian dollar, meaning while the timing of a move to USD parity has been delayed, Kyriakopoulos still expects the AUD will be at parity with the US dollar sometime this year.
