Currencies | Apr 28 2011
– Forecasts for Aussie dollar revised
– CBA remains bullish on Aussie dollar against US currency
– Danske Bank the opposite, suggests booking profits on commodity currencies
By Chris Shaw
With the Australian dollar continuing to trade at post-float record highs against the US dollar, Commonwealth Bank has decided the time has come to revise its currency forecasts. The move also reflects the view the US dollar won't recover until the Fed formally changes monetary policy from an easing bias to a tightening bias.
When that occurs, CBA chief currency strategist Richard Grace expects the weighted two-year swap spread to the US's major trading partners will turn higher, so pushing up the US dollar index. Until this happens, the greenback should stay soft and continue to weaken.
To reflect this view, Grace has pushed out the timing of a recovery for the US dollar by one quarter. This timing change allows for further upside for most currencies against the greenback, the Australian dollar included.
From a longer-term view, Grace suggests the US dollar continues to undergo a long-run structural depreciation. While a temporary rally is likely in the final quarter of this year, this rally should fade and reverse by the second half of 2012 according to Grace.
For the Australian dollar specifically, Grace now expects a greater volume of international capital will look to invest in the Australian dollar. This is supported by evidence foreign central banks are lifting their allocation of Australian dollars within foreign exchange reserve portfolios.
An ongoing lift in Australia's terms of trade should also support the currency in Grace's view, as a better terms-of-trade implies further stimulation to economic activity levels and upward pressure on interest rates and the dollar.
Firm global growth should also help in this regard, Grace noting the International Monetary Fund continues to forecast global GDP growth of 4.4% this year and 4.5% in 2012. These estimates compare to a long-term average growth rate of 3.8%.
What should also support the Australian dollar is continued low market volatility, as Grace points out when market volatility is low, relative economic health tends to drive exchange rates. Given the solid state of the Australian economy at present, this implies the Australian dollar will remain attractive to foreign investors given the solid yields available in Australia.
While the CBA remains bullish on the Australian dollar outlook, Danske Bank offers a counter argument. Danske suggests profits on commodity currencies should now be booked as the risk/reward profile of such positions has become less attractive.
According to Danske Bank, while coming months offer scope for further appreciation, the prospects for falling global PMIs (Purchasing Managers' Index) and a potential correction in commodity prices must now be factored into expectations.
Danske Bank's view is while global growth is becoming increasingly broad-based, the recent run in the oil price poses an increasing risk to growth. This is likely to create a soft patch for the global economy in mid-2011, though this is expected to be only temporary.
As well, Danske Bank sees the near-term outlook for commodities as slightly weaker given the expectation for a softer growth period. At the same time, there is now potential for major central banks to shift focus to tightening monetary policy, especially as there may be a withdrawal of liquidity in core G10 countries.
For the Australian dollar specifically, Danske Bank accepts most factors for the currency are bullish at present, especially as inflation appears to be on the rise and further interest rate increases are again a possibility.
Danske Bank expects the Aussie currency will remain overvalued relative to the US dollar in coming quarters, but risks are now to the downside. This is especially the case given the market is massively long the Australian dollar against the greenback.
Relative to a current spot rate for the Australian dollar against the US dollar of around US108c, Danske Bank is forecasting rates of US108c on a one-month basis, US105c on a three and six-month basis and US100c on a 12-month basis.
In contrast, CBA has lifted forecasts for the Aussie dollar against the greenback to US108c for the end of the June quarter, US112c for the end of the September quarter, US104c for the end of the year and US98c for the end of the March quarter next year. These forecasts compare to previous estimates of US99c, US94c, US92c and US90c respectively.
CBA has also lifted financial year and calendar year average forecasts for the Aussie dollar against the US currency. For the former, forecasts now stand at US99.26c for FY11, US101.75c for FY12, US98.25c for FY13 and US94c for FY14. These are up from US97.26c for FY11, US91.50c for FY12 and US85c for FY13 and FY14 respectively.
Calendar year average price forecasts now stand at US105.4c for 2011, up from US96.9c; US96.5c for 2012, up from US87c; and US98.25c for 2013, up from US85c. Grace notes forecasts for most other currencies have also been increased to reflect downward revisions to US dollar expectations.
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