Currencies | Jul 06 2012
– CommBank believes global dynamics will remain supportive for AUD
– Short term weakness might prevail, however
– AUD/USD projected to reach 1.05 by year's end
By Andrew Nelson
Commonwealth Bank’s Chief Currency strategist, Richard Grace thinks the Australian dollar will continue to push higher as the year progresses. He has put together a long list of reasons as to why this will happen, while seeing few likely issues that could derail the Aussie.
Why will the Aussie stay strong?
First, Grace explains that Australian GDP is simply too strong to warrant an international downgrading of the currency. In fact, GDP increased 1.3% in the March quarter over the previous quarter, putting annualised GDP at 4.3%. The rate doesn’t look little it will falter any time soon, given domestic demand increased by 1.8% in the March Quarter as well.
The next point Grace makes is that despite recent RBA rate cuts, the domestic interest rate is still attractively high when compared to what’s on offer in the US and Europe. This means demand for the Aussie will remain intact, if not increase in the months ahead. Add the fact that Australia still boasts an AAA credit rating and low debt levels, and there is little to hamper this demand.
Another strong supporter of the Aussie is the fact that 75% of exports go to Asia, which is the world’s fastest growing region. While Grace admits some of the shine is coming off China at the moment, his (and many in the market’s) expectation is that more stimulus from Beijing will provide the required jumpstart. Add to that the fact that the AUD tends to be lumped in with a GDP weighted basket of Asian currencies, strength in Asia means a stronger basket, thus a stronger Aussie.
Despite the doom and gloom out there, Grace notes global economic growth is only slowing modestly. That means high commodity prices are a distinct possibility and we all know what higher commodities mean for the Aussie.
Grace also points out that one of the things that has been limiting the Aussie is a revival in the greenback of late. However, he sees a few things that will cap the top end of USD appreciation. US interest rates are unattractive, the recovery thus far has been less than convincing and the nation as a whole is running at a deficit. He expects the USD will be lower by year’s end.
Lastly, Grace points out that all of the above issues have created even more interest in the Aussie from global central banks and large money managers, who have been steadily accumulating both AUD and A$ bonds. He notes offshore entities now own 80% of Australian bonds on issue and given the level of demand from this segment is expected to remain, if not increase, even more support for the AUD should emerge.
Pulling out his crystal ball, Grace predicts the AUD/USD will continue on at slightly above 1.0200 over the next six months. This level being just below the average of the last 20 months.
Over the next two months Grace predicts rallies above 1.0400, which he notes would present a good opportunity to sell into. With Asian domestic demand likely to slow a little more before it resumes its upward track, he sees some chances for a dip in the Aussie, but only down to 0.9800, or so.
The story reverses over a 3-5 month time frame, with policy responses from Europe, the US and Asia likely to generate stronger global economic activity. Over this period he thinks dips in the AUD towards 0.98000 would present good buying opportunities, with the Aussie ultimately up to 1.0500 by year’s end.
There are a few things that could derail the AUD, namely a bigger than expected slowdown in China, even worse fallout from Europe that disrupts global credit markets and lastly, a bigger than expected slowdown in the US recovery. Yet while any one of these would provide some downward pressure, in the end, he sees them as unlikely on balance.
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