Currencies | Jul 13 2012
– CBA revises forex forecasts
– Euro and British Pound estimates lowered
– Australian dollar cross rates increase as a result
By Chris Shaw
To account for longer-lasting recessions in both Europe and Great Britain than had previously been forecast, and further monetary easing, Commonwealth Bank has revised down forecasts for both the euro and the pound sterling.
Further monetary policy easing in Europe should also help support the US dollar, as CBA chief currency strategist and head of international economics Richard Grace notes further policy changes are likely to maintain downward pressure on European two-year swap rates.
For the euro, Grace's forecasts adjust to a rate against the US dollar of 1.22 for the end of the September quarter and 1.25 at the end of December this year. These compare to previous estimates of 1.30 and 1.34 respectively.
By June next year Grace sees the euro trading at 1.30 against the greenback and at 1.32 by the end of December 2013. Previous forecasts were 1.35 and 1.33 respectively.
With respect to the UK, Grace notes GDP has contracted in four of the past six quarters and this is likely to extend to five out of the past seven quarters when the next data is released later this month. Given the weak economy, credit demand is expected to remain lacklustre, leading Grace to suggest further monetary stimulus is likely. This should weigh on gilt yields and the currency.
As a result Grace expects the EUR/GBP will remain below 0.80 through the next few quarters as the current downward trend in the currency pair is not expected to change in the nearer-term. To reflect this Grace's adjusted EUR/GBP forecasts stands at 0.7821 for the end of September and 0.7911 for the end of December. Previous forecasts were 0.8125 and 0.8272 respectively.
Into 2013, Grace is forecasting an end of June rate for the EUR/GBP of 0.8025 and end December of 0.8049, which compares to previous forecasts of 0.8182 and 0.8110.
There are no changes to Grace's forecasts for the the AUD/USD pair, but cross rates for the Australian dollar against the European currencies have increased given the changes to euro and UK pound estimates.
Against the euro, Grace is now forecasting rates of 0.8443 for end of September and 0.8400 for end of December, against previous forecasts of 0.7923 and 0.7836. Revisions are similar against the pound, new forecasts standing at 0.6603 for end of September and 0.6646 for end of December this year, compared to 0.6438 and 0.6481 previously.
Grace has also adjusted forecasts for the Australian dollar against the yen to reflect a firmer Japanese currency. The strength in the yen stems from the existence of a current account surplus in Japan and relatively lower price pressures in that economy.
Against the yen, Grace's revised forecasts stand at 81.37 for end of September and 82.95 for end of December this year, compared to 85.49 and 89.25 previously. Grace now doesn't expect the Australian dollar will top 85.00 against the yen until the September quarter of 2013.
As with the Australian dollar, forecasts for the New Zealand dollar against the US dollar are unchanged but cross rates against European currencies have increased. Grace expects the New Zealand dollar will remain strong given that country sends most of its merchandise exports to Asia and Australia, where economic growth remains relatively strong.
For the New Zealand dollar against the euro, forecasts have been adjusted to 0.6721 for end September and 0.6640 for end December, which compare to previous estimates of 0.6308 and 0.6194. Changes to Grace's forecasts for the NZ dollar against the British pound have moved the same way but are of a smaller magnitude.
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