Currencies | Jul 12 2012
– Conflicting factors impacting on Australian dollar
– Currency has likely peaked against the US dollar
– St George Bank suggests shorter-term risks weighted to the downside
By Chris Shaw
As noted by St George Bank, there are conflicting issues at play with respect to the Australian dollar at present. While global growth concerns have pushed down commodity prices and Australia's terms of trade appears to have peaked, the fact the domestic interest rate structure is above those of other major economies is supporting the dollar.
The Australian dollar has fallen from above US$1.08 in January to around parity now and in St George Bank's view risk remains to the downside over the balance of this year unless the major economies undertake some decisive stimulus activity.
Downside risk for the dollar reflects the fact a number of uncertainties need be dealt with before the end of the year. For St George Bank these include the upcoming US Presidential election, a possible European banking crisis, ongoing issues in the Middle East and the state of the US fiscal position.
This range of factors leads St George Bank to suggest it will be difficult in coming months for the dollar to regain levels around US$1.08 seen earlier this year, as there appears little potential for any change in direction for commodity prices or the Australian terms of trade in the short-term.
For any Australian dollar resurgence St George Bank suggests there would need be some stabilisation in Chinese economic growth at between 7-8% per year. As well, lower official interest rates in Europe and further quantitative easing in the US would also be required.
In terms of what could move the Australian dollar significantly lower, St George Bank suggests severe financial disruption in European financial and banking markets and a further sharp fall in Chinese economic growth would be significant factors.
With respect to forecasts, St George Bank expects a AUD/USD rate of $1.00 for the end of the September quarter and US$1.01 for the end of December quarter this year, rising to US$1.03 by the middle of next year and US$1.04 by the end of the September quarter in 2013.
These forecasts lead St George Bank to suggest the Australian dollar has seen the maximums and minimums of its trading range for 2012, though further volatility is expected in coming months.
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