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'Strong risk': Australian dollar tipped to go as high as US85¢

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by July 18, 2017 General

The Australian dollar appears poised to rise to US80¢ soon, buoyed by the dual forces of a domestic economy where the mood is becoming decidedly more upbeat, just as financial markets are losing faith in the prospects for more US interest rate rises.

The currency hit a more than two-year high on Tuesday after the Reserve Bank of Australia minutes showed the board holds a more hawkish view of the economy’s neutral rate than consensus suggests, sending the currency to a high of US79.07¢ for a US1¢ intraday jump. Earlier, the euro broke through the critical $US1.15 level for the first time in more than a year.

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“I keep talking to people who are so bearish on Australia and they’re blind to the actual numbers coming out,” said Greg Gibbs, head of Amplifying Global FX Capital. “The market’s not particularly long the currency and dismissive of some fairly positive data coming out of Australia.”

That is changing. Mr Gibbs said there’s a “strong risk” that US80¢ if not US85¢ levels are achieved. That’s not just because the RBA might have to consider the case for interest rate hikes sooner than market pricing implies.

“The US drives the equation as well; you’ve got [Janet] Yellen last week, the inflation numbers are horrible, then you’ve got the politics side of it and that could really become a kicker for the [US] dollar. The market confidence around the politics could fall over,” he said.

“As soon as the market feels that rate rises aren’t really on the agenda,” the US dollar appears more vulnerable. Dr Yellen’s statement last week that low inflation could be more persistent than the Fed first thought has undercut forecasts for further hikes in the world’s largest economy.

“Why would you be raising rates if you’re going to start this quantitative easing unwind? The Fed has gone on ice before, they went on ice for all of 2015,” Mr Gibbs recalled.

“The inflation outlook is not as rosy as the Fed would have us believe,” agreed Gareth Berry, a foreign exchange and rates strategist at Macquarie in Singapore.

“That alone will allow Aussie-US to crack that upper limit on the range. The trigger could come in the form of next week’s FOMC statement, if not before. Meanwhile, the US dollar is going to weaken further the higher eurodollar goes,” he said.

If the Australian dollar gets to US80¢ “and that is possible, it would become fair game once more to reflect on the currency strength and ask whether it’s justified by fundamentals. So far the fundamentals are there now given the iron ore price.”

Iron ore rallied 1.6 per cent to $US66.81 a tonne on Monday.

Richard Grace, chief currency and rates strategist at Commonwealth Bank of Australia, sees the only risk to his forecasts as being the currency getting there sooner than expected. CBA’s Australian Commodity Price Index in US dollar terms is up 10 per cent since the middle of June.

“If commodity prices are going up, you’ve got income coming into the Australian economy. That’s helping things, you’ve got a trade surplus, all these factors are supporting a higher Australian dollar,” he said.

CBA has a year-end forecast of US76¢ rising to US78¢ in the first quarter of next year and “eventually” back to US80¢.

Mr Gibbs speculated that RBA governor Philip Lowe’s views on the Australian dollar were consistent with his predecessor Glenn Stevens, who presided over the era of Australian dollar parity with the US dollar.

The RBA has resisted any pointed commentary on the currency in its latest statements, saying in Tuesday’s minutes only that “an appreciating exchange rate would complicate this adjustment” in reference to the post-mining boom.

“The view around the currency probably hasn’t changed dramatically, if there’s a harder view it’s around the debt levels,” Mr Gibbs said. “The RBA would love the Aussie to be lower for policy reasons but this is a fairly broad [US] dollar move underway.”

Asked in September 2016 in his exit interview with The Australian Financial Review whether the currency was appropriately valued, the former governor said: “I think it was too high, it wasn’t responding enough to the fundamentals in the economy. When we thought that, we said that.”

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