Currency strategists are reviewing their year-end forecasts for the Australian dollar after its renewed buoyancy following the US Federal Reserve’s surprise decision not to cut stimulus, but do not expect it to return to parity with the US dollar.
The National Australia Bank’s currency strategists revised upwards their forecasts for December 2013 from 86 to 92 US cents. They also revised their 2014 forecasts by between 4 to 6 US cents*.
The higher forecasts are driven by expectations of an improving Chinese economy, the rise of some hard commodity export prices and the support for emerging markets that the Fed's decision has given, NAB currency strategist Ray Attrill said in a research note.
The Australian dollar breached the 95 US cents level yesterday morning after a surprise move by the Fed to delay its tapering plans sent the US dollar tumbling. It was buying 94.45 US cents about 3pm today.
Just a ‘delay of the inevitable’
While the Australian dollar was expected to stay at elevated levels in the short term, Commonwealth Bank currency strategist Peter Dragicevich said the Fed’s announcement “in our view just delays the inevitable”.
“It doesn't change the trend so we don't expect the Aussie to drift too much higher from current levels,” Mr Dragicevich said.
He added that he did not envisage any reviewed forecasts from the CBA’s new figures would vary drastically from the bank's current year-end forecast of 92 US cents.
"As the market starts to price in the prospect of tapering later in the year, once again the Aussie should come back under some downward pressure."
ANZ currency strategist Andrew Salter said businesses that have foreign liabilities and expenses could benefit from what he sees as a temporary spike in the dollar by using the current levels to place longer-term hedges.
Other investors could take on short positions on the Australian dollar for the expected return to lower levels in the medium-term.
“We still see fair value in the Australian dollar as below 90 US cents by 2014, so we're pretty confident. That's a view that's derived from our expectations for commodity prices in China,” Mr Salter said. "So we're pushing on the 'sell 95, sell 96' as being a trade of high conviction.”
The state of financial markets and currencies also meant an opportunity for borrowers to fix their rates while they are "very low and the potential for rates to move a lot higher is evident from history", Mr Salter and ANZ interest rate strategist Zoe McHugh added in a research note.
They said while ANZ economists are forecasting a last 25 basis points rate cut in November, markets are almost fully priced for such an outcome and that any last easing would not lower term rates further.
Support for rally waning
The rally in financial markets and currencies against the US dollar was also weakening, FXCM market analyst David de Ferranti pointed out, noting the slippage in the Australian currency overnight.
“The market is conscious that the Fed is still set to normalise monetary policy and that it is just a question of timing,” he said.
Mr de Ferranti’s comments were echoed by CIMB analysts, who warned investors not to be complacent about the Fed’s decision, as the central bank’s current policy settings "appears to be on borrowed time".
"The fact that the Fed did nothing about changing expectations in the lead-up to last night’s FOMC meeting has left markets unclear about its intentions," the analysts say in a research note. “It could be that the Fed has no conviction about its own optimistic growth forecasts and, if this is the case, then the market’s rally will be brief.”
Mixed views on another RBA rate cut
Economists were more mixed about the likelihood of another RBA cut this year to bring the cash rate down to 2.25 per cent.
Citi economists said despite soft unemployment levels and CPI data, mixed US and Australian growth and a stronger-than-expected Australian dollar, "the bar for another cut is now much higher than previously".
"We expect the RBA to remain on hold and continue with its guidance that it neither closes off the possibility of reducing rates further nor wishes to signal an imminent intention to reduce rates,” economists Paul Brennan and Josh WIlliamson said.
In contrast, Macquarie economists, who have been bearish about the Australian economy, said in a note calling for further cuts that the RBA was wrong to maintain a “glass-half full” view of growth as it had lent support to the currency, and called it counterproductive.
“It needs to convince markets that it will keep on cutting rates until the currency starts to fall,” they said. “If the RBA cuts the cash rate to, say 2 per cent, but markets price in the possibility that the cash rate might be 1.5 per cent in a year’s time, then we are of the view that it would have a material impact on the currency.”
Financial markets were pricing in a 6 per cent chance of a 25 basis points interest rate cut in October, and a 33.1 per cent chance of a cut in November, a slight rise from yesterday.
*NAB’s revised forecasts:
March: From 84 to 90 US cents
June: From 83 to 88 US cents
September: From 81 to 86 US cents
December: From 80 to 84 US cents