Currencies | Feb 20 2012
– CBA reverses previous AUD adjustments
– Now doesn't expect global growth to weigh on the currency
– Forecasts are for a rate of 1.10 against the US dollar by March 2013
– Modest changes to expectations for other currencies
By Chris Shaw
Following a review of market conditions, Commonwealth Bank has revised its currency forecasts, the most significant change being to return estimates for the Australian dollar back to the levels of last September. This reverses a downward revision made in December.
The bank's chief currency strategist and head of international economics, Richard Grace, points out the revisions in December were made in response to downward revisions to global growth stemming from the Eurozone crisis. Grace notes historically downward revisions to global growth have tended to place downward pressure on the Australian dollar.
But the December response was wrong in hindsight, Grace now notes, as there were three reasons the global growth revisions didn't flow through to lasting pressure on the Australian currency. The first was improving US growth has largely offset the growth issues in Europe. As well, Grace notes international demand for Australian bonds has been high, as evidenced by the fact 75% of Australian Federal Government bonds on issue are now owned by foreigners.
Finally, Asian economic growth, which is where Australia does a significant portion of its trade, is not likely to slow much below trend levels. This has supported commodity prices at reasonably elevated levels, which in turn has supported the currency.
Looking forward, Grace expects the Australian dollar will remain firm given global GDP growth expectations for 2012 are no longer being revised lower and growth in 2013 appears set to come in above 4.0%.
Solid commodity prices should also support the currency in Grace's view, this thanks to ongoing solid growth in China and through Asia in general. What should help here is authorities in several Asian countries are now loosening policy, which should support commodity demand.
Finally, Grace notes the Reserve Bank of Australia (RBA) has indicated there is a high bar to any future cuts in interest rates. A strong Australian dollar may not be wholly unwelcome, as Grace notes this helps offset strong non-tradeables inflation that remains prevalent in the domestic economy.
In terms of forex forecasts, CBA now expects the Australian dollar relative to the US dollar will end the March quarter at 1.07, rising to 1.08 in the June and September quarters and ending the year at 1.09. A further gain to 1.10 against the US dollar is expected by the end of March 2013.
These forecasts compare to previous estimates of 0.98 against the US dollar for the March quarter, 0.95 for the June quarter, 0.97 for the September quarter and parity at the end of 2012. Grace had previously forecast a March 2013 rate of 1.02 for the Australian dollar against the greenback.
Similar changes have been made to CBA's estimates for the New Zealand dollar and for the same reasons as the changes in the Australian dollar. Grace now expects NZ dollar rates relative to the US dollar of 0.84 for the March quarter, 0.85 for the June quarter, 0.86 for the September quarter and 0.88 for the end of the year. These compare to previous estimates of 0.75 and 0.73 for the March and June quarters and 0.78 for both the September and December quarters.
Elsewhere, CBA has made mainly modest changes to its foreign exchange assumptions. The scenario for the US dollar remains continued strength in the first half of this year before a weaker second half, while there remains scope for some additional strength in the euro towards the end of this year as the region exits its mild recession.
One currency where the changes to forecasts for CBA have been more significant is the Canadian dollar, Grace now expecting further strength in the loonie relative to the US dollar. A number of reasons support this, including the fact revisions to global growth forecasts are no longer moving lower, which is supporting commodity prices.
Also positive for the Canadian dollar are the positive surprises in US economic data, as this market accounts for around 75% of all Canadian exports. As negative influences in the US and in Europe dissipate, Grace expects improvements in Canadian consumer and business confidence, which is expected to flow through to the currency.
As the Canadian economy improves it will allow the Bank of Canada to re-start the process of returning interest rates to more normal levels. Grace expects this process will occur through 2013. New forecasts for the Canadian dollar relative to the US dollar for CBA now stand at 0.99 for the end of the March and June quarters, 0.98 for the end of September and 0.97 for the end of this year. These compare to previous forecasts of 1.07, 1.10, 1.08 and 1.05 respectively relative to the US dollar.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
