Currencies | Aug 31 2011
– ANZ expects bear trend in US dollar to continue
– Euro should outperform given more favourable fundamentals
– Australian and New Zealand dollars also likely to gain on greenback
By Chris Shaw
The US dollar has rallied a little in the past few weeks, but as ANZ Banking Group notes the rally has been less than what some market-based relationships, such as against equities and interest rate spreads, would suggest.
In ANZ's view, if the US dollar cannot achieve a meaningful rally given the various concerns arising in recent months it may take a genuine global recession to generate a real improvement in the greenback. As this is not the bank's expectation, ANZ remains bearish on the US dollar outlook.
This bearish view reflects a number of factors, including that the US dollar's fundamentals are simply very poor given the need to fund a 3% of GDP current account deficit and an ongoing downshift in medium-term US growth expectations. At the same time growth in emerging markets has moderated only to trend and not more sharply.
ANZ suggests policy will remain a key source of influence on financial markets and the bank's view of fundamentals implies for as long as policymakers keep any squeezes on liquidity moderate, the bear trend in the US dollar will stay intact.
Supporting this is ANZ's view Asian central banks will be dollar sellers in the current environment. This is because the fear of financial market volatility will cause a response to any sign of a stronger US dollar.
Diversification of central bank reserves also suggests some US dollar selling, ANZ seeing the Australian and New Zealand dollars as beneficiaries given commodity exposure, strong credit ratings and sound fiscal and monetary frameworks.
With respect to the euro relative to the US dollar, ANZ continues to favour a higher euro given interest rates differentials continue to favour Europe and Europe has a near balanced current account deficit. This is far superior to the deficit situation in the US.
While a pure monetary approach to exchange rates suggests a shift in the balance of QE towards Europe would be a negative for the euro, ANZ's take is the answer is not quite so simple. The European Central Bank (ECB) has taken a different approach to the Fed, so its policy is not the same as an easing in monetary policy.
There remains scope for the ECB to need to introduce a more full-blown form of QE, but ANZ suggests this would be to achieve financial stability rather than to generate growth as the Fed is trying to achieve. This implies the US dollar remains the weaker link, so supporting ANZ's view the euro is the more likely of the two currencies to strengthen.
So to should the Australian dollar relative to the greenback, ANZ forecasting a year-end level for the Aussie currency of US$1.14. This reflects expected support from the strong mining investment outlook and a narrowing of the Australian current account deficit, as well as supportive interest rate differentials.
For the New Zealand dollar ANZ expects a year-end rate against the US currency of US$0.93, supported by better than expected data flow out of New Zealand and still elevated commodity prices. This suggests outperformance for the New Zealand economy relative to global peers, something expected to push the the currency higher.
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