Currencies | Oct 08 2010
By Chris Shaw
With weaker growth signals persisting for the US economy, further quantitative easing measures by the US Federal Reserve are very much on the cards. Expectations of such measures have seen the US dollar trade lower in recent weeks, allowing the Australian dollar to move close to parity against the greenback.
Westpac notes the strength in the Australian dollar has largely been confined to the US dollar cross, as the domestic currency has for example largely moved in line with the euro over the same period.
Westpac chief economist Bill Evans has lifted expectations for any quantitative easing target from US$800 billion previously to US$1.5 trillion now. In Evans's view it is unlikely currency markets are pricing in such a magnitude of easing measures, which means further US dollar weakness is likely through at least the first half of 2011.
At the same time, other central banks such as the Bank of Japan have announced quantitative easing programs of their own, while others such as the Bank of England are expected to follow suit. This contrasts to Australia, where Evans expects further rate hikes by the Reserve Bank of Australia both this year and next.
The impact of these different policies should make the Aussie dollar attractive for global investors, especially as the injection of liquidity into the global system by central banks should contain the usual threat to the currency of an increase in global risk assessments.
To reflect this, Evans has lifted his forecasts for the Australian dollar relative to the US dollar. His new year-end target stands at US102c, up from US98c previously. By the middle of next year Evans now sees the Aussie dollar hitting US105c, driven by not only the expected increase in global liquidity but ongoing support for commodity prices thanks to a soft landing in China.
Goldman Sachs has similarly lifted its Australian dollar estimates relative to the US dollar, the broker also recognising expected quantitative easing measures in the US will continue to weaken the greenback relative to other currencies.
As with Evans, Goldman Sachs also sees interest rate differentials and commodity prices moving further in the Australian dollar's favour in coming months, which is expected to show up more in the AUD/USD pair than in the Australian dollar against other major currencies.
On 3-month, 6-month and 12-month views Goldman Sachs is now forecasting US100c, US103c and US105c for the Australian dollar against the US dollar, which is well up from previous estimates of US88c, US88c and US86c respectively.
Among the other major currencies, the largest changes to forecasts made by Goldman Sachs are in the AUD/Yen and AUD/EUR crosses. For the former the stockbroker is now forecasting 81, 83 and 89 on 3-month, 6-month and 12-month time frames compared to 75, 73 and 77 previously. Against the euro, new forecasts are 0.71, 0.69 and 0.68 for the same time frames, which compares to previous estimates of 0.72, 0.65 and 0.62.
Taking a longer-term view, Westpac's Evans points out sometime in the second half of 2011 the new quantitative easing policies should be curtailed, something that would boost demand for the US dollar. At the same time, the Australian economy is likely to be losing some momentum, so a move back to a range of US95-100c appears likely later in 2011.
Attached is a chart of the Australian dollar against the US dollar since the Australian currency was floated in 1983 (with special thanks to CommSec).
