Aussie to rise to US92¢ next year_ Westpac

8/10/2019 Aussie to rise to US92 next year_Westpac

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Aussie to rise to US92 next year: WestpacPRINT EDITION: 20 Nov 2014

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Westpac and the RBA are at odds over the dollars future value. Photo: Ian Waldie

US inflation figure pushes $A higher Interest rates may stay low for years, says RBAAustralian dollar returns to near four-year lowRBA takes aim at Japans currency devaluation

Though Reserve Bank Australia chief Glenn Stevens is doing all he can to talk the dollar down, Westpac BankingCorporation, the economys most-accurate forecaster, said it is set to rise well above its current value.

The nations second-biggest lender predicts the yield premium that Australian bonds offer over US Treasurieswont narrow even as the US Federal Reserve moves to raise its benchmark interest rate. Westpac believedinvestors would continue to seek Australian bonds, the worlds highest AAA sovereign returns, driving gains in the

Aussie.

Mr Stevens warned this week there is a pretty material risk that the currency, the developed worlds mostovervalued afte r the kiwi, will go lower. Policymakers said four times this month the Aussie remains high enoughto slow the ec onomy as the Reserve Bank maintains record-low benchmark rates. The local dollar hasappreciated about 5 per cent this year, the most after the greenback among 10 developed-market currenciestracked by Bloomberg Correlation-Weighted Indexes.

The failure of US yi elds to rise in re sponse to decent economic data does raise more serious questions aboutwhether the US dollar is primed for a sustained rally, particularly against high-yielding currencies such as the

Aussie, said Westpac strategist Sean Callow. Over the next few months the Aussie will trend higher against theUS dollar.

Westpac predicts the Aussie will climb to US88 next month, from 86 at 7.39pm AEDT. The currency is set tostrengthen further to US90 in June and US92 at the end of next year, Mr Callow wrote in an email onWednesday.

Policymakers are fretting over a disconnect between the currency and falling commodity prices, led by a morethan 40 per cent drop in iron ore, the nations biggest export. In trade-weighted terms the Aussie was higher at theend of last month than in January despite declines in key commodity prices since then, the RBA is recorded assaying in minutes of its November 4 meeting.

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Iron ore extended a tumble to its lowest price in more than five years this week as declining home prices in Chinaadded to concern that an economic slowdown will deepen in the worlds biggest steel buyer.

China growth

It will impact the terms of trade for Australia, Roy Teo, a strategist in Singapore at ABN Amro Bank, saidyesterday. That is negative for the Aussie.

A Chinese manufacturing gauge fell to a six-month low in November , suggesting that growth in the Asian giant is

slowing further in the fourth quarter. The preliminary purchasing managers index from HSBC and MarkitEconomics was at 50.0, below the median estimate of 50.2 in a Bloomberg News survey and lower than lastmonths 50.4. Numbers above 50 indicate expansion.

Australias terms of trade, or export prices relative to import prices, have fallen 22 per cent since their peak in thethird quarter of 2011 and will fall further, Mr Stevens said this week.

ABN Amro forecast that the Aussie will decline to US86 at the end of December and US78 by the end of nextyear, Mr Teo said.

The Australian dollar is 22 per cent overvalued, the most among Group of 10 currencies after New Zealands dollar,according to a purchasing-power parity measure that takes into account consumer-price inflation.

The price of steel-reinforcing bars, used in construction, has risen 3.5 per cent since September 26, fuellingoptimism over demand, Mr Callow said. Spot iron ore prices are set to recover to $US100 per tonne in the firstquarter, from $US80 tonne at the end of the year, according to Westpac. Global economic growth is set toaccelerate to 3.7 per cent in 2015 from 3.2 per cent this year, boosting commodity prices, according to the bank.

Westpac chief economist Bill Evans was the most-accurate forecaster of Australian economic growth over thepast two years, according to data compiled by Bloomberg.

While the spread between Australian and US 10-year government bonds could narrow to 72 basis points at theend of the year, it is set to widen to around 90 basis points in 2015, according to analysts surveyed byBloomberg. At 3.27 per cent, Australian benchmark yields are among the highest for developed nations, with onlydebt from Greece, Iceland and New Zealand surpassing them.

Treasury yields showed limited reaction this month to strong US economic data, including better-than-expectedretail sales, Mr Callow said.

Japanese concerns

Brisbane-based money manager QIC sees a growing risk that US bond yields will fail to climb as the Fedincreases its cash benchmark, echoing the dilemma faced a decade ago by then Fed chairman Alan Greenspan.While the US is poised to tighten monetary policy, the Bank of Japan and the European Central Bank are creatingever more liquidity.

The RBA is right to be concerned that the BOJs expanded easing will help keep the Aussie higher thanfundamentals warrant by spurring more purchases of Australian debt, said Katrina King, director of research and

strategy at QIC, which oversees the equivalent of more than $60 billion. She estimated that could see monthlyinflows from Japan rise by 60 per cent.

For the RBA that means they will be held on neutral for longer than they otherwise would have been, because the Australian dollar will be held up higher than it otherwise would be from fair value models, she told reporters onNovember 18 in Sydney.

The RBA is likely to continue to see an overvalued Australian dollar is a constraint on Australian growth,Westpacs Mr Callow said. To the extent that commodity prices rise, as we expect, the currencys fair value willalso rise, so over-valuation will not necessarily grow.

Bloomberg

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Aussie to rise to US92¢ next year_ Westpac