By Jim Vrondas, OzForex

Currency markets breathed a sigh of relief following the release of the European bank stress tests. After nudging 1.2600 against the greenback last week the euro started the new week on a positive note, pushing above 1.2700 seemingly buoyed by the results.

Of the 130 banks tested across the region 25 failed, with the ECB identifying a gap of 24.2 billion euros in capital required as of the end of 2013. When you distil this down further the results seem more benign with 19 billion already raised this year, the aggregate shortfall is reduced to 6 billion.

The markets will now focus more specifically on the five major banks that need more than 200 million euros and must submit a capital plan, no doubt more headlines will follow.

Stronger European banks no medicine for growth

The credibility of the tests are quite rightly being questioned but on the positive side the result is significant because it emphasises the large capital raising and de-leveraging efforts the banks have undertaken since the last stress tests in 2011. The good news is that bank spreads have tightened making them more stable – for now.

Although the banks are in a stronger financial position the European economy is still not looking that flash. The economic slowdown appears to be spreading from the peripheral to the core with signs of weakness in Germany and fears of a deflationary spiral across the region still evident.

With the ECB only just beginning to print money the banks will no doubt be encouraged to “give” more money away, but there are still question marks around how much of this money will reach the real economy and whether it will positively impact growth.

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By Jim Vrondas, OzForex

It’s a big week for the Australian dollar this week, which will likely see volatility continue. Three RBA officials are due to speak (Assistant Governor Christopher Kent, Deputy Governor Philip Lowe and Governor Glenn Stevens) in addition to monetary policy minutes and inflation

AUD/USD has been trapped between 0.8650 and 89 cents, it’s sitting in the middle of it now but if Stevens and company err on the dovish side then we could test 0.8650 again this week. On the domestic data front we’re expecting both headline and trimmed mean CPI to soften, also weighing on the AUD.

We’re also expecting to hear RBA officials talk to global growth concerns, asset price rises, commodity markets and terms of trade and of course the Aussie dollar.

It’s no coincidence that Glenn Stevens goes last as he may need to clarify any comments made earlier in the week should the market react in an unexpected manner (or too aggressively)

Can the Greenback continue to rise?

Markets ignored US Federal Reserve chair Janet Yellen’s comments about growing inequality in the US and instead focused on consumer sentiment figures. These exceeded expectations, coming in at 86.4 vs 84.3 forecast, the highest reading since July 2007 – pre GFC levels

The US dollar gained ground against the majors and gapped higher against the Yen on the open this week as well. It shows a shift away from the risk aversion trade that saw the Yen strengthen in recent weeks, in my view optimism could linger a little longer but the US is not out of the woods yet.

USD can continue to strengthen but have to be selective – I prefer a long USD position against the Euro still, with USD/JPY too susceptible to shifts in risk sentiment.
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As Australians we love to make jokes at the expense of our Trans-Tasman neighbours, but the Reserve Bank of New Zealand’s management of interest rates in the face of a rising currency is one to be admired. Notwithstanding some of the differences in our two economies, it took some nerve for New Zealand’s central bank to raise rates by 1 per cent earlier this year, despite what was a rising New Zealand dollar at the time.

On March 13, when the RBNZ increased interest rates from 2.5 per cent to 2.75 per cent, it was the first change in over two years. At the time the New Zealand dollar was trading above US86c, around 2 per cent below its all-time high. The bank then subsequently raised the official cash rate three more times to 3.5 per cent, pausing in July when the exchange rate was above US88s. For a small island nation that relies so heavily on its exports, one could call this a rather risky strategy.

It was however a necessary step in order to curb inflationary pressures stemming from a booming housing market which, combined with the introduction of new macro prudential measures, are showing some signs of working. In contrast to the RBA, the RBNZ overlooked the elevated currency and raised rates anyway.
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The signs have been clear for some time: the Aussie dollar should be lower. Commodity prices and iron ore in particular have been in decline for several months already. The Federal Reserve made it clear early in the year that the quantitative easing program would be coming to an end around October and the European economy never really got moving. China was expected to engineer a soft landing with economic growth to come in at around 7.5 per cent, well below the historical levels, which are closer to double digits.

Despite all these signs, the local unit has been resilient. I expected this phenomenon to continue for a few months yet, so have been surprised by the recent price action. Over the last week the big shift lower intensified once support around the US92c level gave way, pushing it below the psychological US90c level.

With the absence of any new news the question many are asking is — why now? Why is the Aussie dollar suddenly reacting to information we already knew?
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It’s a huge week ahead on the data front for the Australian economy. We have building approvals, GDP, retail sales and trade balance all out — can any one of these sway the Aussie dollar one way or another?

GDP is obviously particularly critical as it’s a key measure of economic growth. The market is expecting a pull-back from first quarter +1.1 per cent result to a second quarter reading of +0.4 per cent. This would bring the annualised rate down from 3.5 per cent to 3 per cent, but it is somewhat of a lagging indicator.

The beauty of this week’s releases is that we get a broad reading on the domestic economy, with data providing some insight across a number of fronts. Building approvals are important for construction activity and general confidence in the economy; so too are retail sales and the state of the consumer.

I can’t see any of these moving the Aussie out of this range unless we get a softer-than-expected GDP reading of say 0.2 per cent or less for the quarter — in this scenario we could see a re-test of strong support between 92c and 92.50c.

RBA decision due

Will today’s Reserve Bank of Australia meeting have any impact on the currency this time? Well we know the RBA has been struggling to exert real influence over the Aussie, despite continued attempts to talk it down. It’s not the only one concerned about the local unit’s strength: BIS Shrapnel recently blamed the high dollar for sapping the strength of Australia’s economic recovery.
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As the US dollar rally starts to gather momentum, the euro is approaching its lowest levels in almost a year.

Divergence between the FOMC and ECB interest rate outlooks has been the main driver behind the move that has seen the euro fall 6 per cent since early May. The wedge between the two is only getting wider, with comments from both US Federal Reserve Bank chair Janet Yellen and European Central Bank president Mario Draghi dragging the euro lower over the weekend.

Change of tone in the US

Most of the focus from the Jackson Hole symposium over the weekend has been on remarks made by Janet Yellen. Her comments on the North American economy appear more neutral than hawkish as some have suggested.

They are, however, less dovish as the market has come to expect, and it was a reference to interest rate hikes potentially coming “sooner than market participants currently expect” that sparked a flurry of demand for the greenback. Although the timing on US interest rates is unclear, Yellen’s tone is to be expected, especially from a central bank edging very slowly towards monetary policy tightening.

Economic data takes centre stage

Looking beyond the headlines, it is clear there are still some considerable risks ahead for the US economy. The Fed is looking at much more than just the unemployment rate for a reading on the employment market.
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AUD/EUR Fundamental Outlook
AUD/EUR continued gaining ground in July, gaining another +0.9% overall for the month. The gain in the cross was in part due to asset flows and risk appetite favouring the Aussie over the Euro, the interest rate differential and as both economies reported mixed economic numbers. Economic data out of Australia was on balance better than Eurozone numbers, although weakness was evident in Retail Sales, Building Approvals and the Trade Balance.

Traders will be looking to the ECB rate decision on the 7th, as well as the RBA’s Monetary Policy Meeting Minutes for a better perspective on the direction of the cross. Due to weakness in the Eurozone, the rate differential and improving numbers in Australia, the outlook for the cross is positive in the near and medium terms but neutral longer term.

AUD/EUR Technical Chart Outlook

After making a 0.6314 low in late January, AUD/EUR has since been rallying correctively. The cross made yet another recent high at the 0.7035 level on July 23rd after breaking up out of a mildly declining consolidation range on the 21st.

The outlook for AUD/EUR over the coming month is mildly bullish short term and more bullish in the medium term while the channel top line break is sustained to set up a 0.7780 breakout target.
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AUD/USD Fundamental Outlook
AUD/USD reversed direction in July, dropping -1.4% for the month overall. The decline in the rate was in part due to speculation of tightening by the Federal Reserve, continued dovish RBA monetary policy and mixed economic data from both countries. Australian economic numbers were mostly better than expected or on target in July, with the notable exceptions of Building Approvals, Retail Sales and the Trade Balance, all printing lower than the analyst consensus. In addition, the Australian Unemployment Rate rose a notch to 6% from 5.9%.

Traders will be looking to the RBA’s Monetary Policy Meeting Minutes on the 19th and the FOMC Meeting Minutes on the 20th for a better indication on interest rates and the direction of the exchange rate. Due to continued risk appetite favouring the Greenback, the outlook for the rate is neutral in the near term, lower in the medium term and higher in the long term.

AUD/USD Technical Chart Outlook

After AUD/USD peaked at the 0.9461 level in early April, the rate has since been range trading between that high point and the 0.9202 low of May 1st. Early July saw the rate decline within this range to 0.9378 before then rallying to 0.9474 by the 23rd. The rate subsequently sold off to call as far as the 0.9275 level by July 31st.

Overall, AUD/USD’s medium term outlook gives a neutral to mildly bearish appearance while trading between its 61.8% and 50% Fibonacci retracement levels at 0.9271 and 0.9573 respectively.
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GBP/AUD Fundamental Outlook
GBP/AUD gained fractionally in July, increasing 23 pips or +0.1% overall for the month. The marginal increase in the cross was in part due to asset flows favouring Sterling over the Aussie and with mixed economic numbers out of both countries.

Traders will be watching the BOE rate decision on the 7th, as well as the RBA’s Monetary Policy Meeting Minutes on the 19th for a better idea on the direction of interest rates. Due to the interest rate differential and improving numbers in both countries, the outlook for the cross is neutral near term but otherwise positive.

GBP/AUD Technical Chart Outlook
GBP/AUD rallied to peak at 1.9186 in January, but then came off as far as the 1.7736 level in early April. The cross has since been consolidating within a gently rising range, making highs at the 1.8373 and 1.8364 levels in July.

Overall, the outlook for GBP/AUD looks rather neutral over the coming month until it breaks out of its current gently rising channel to signal an additional move in the direction of the breakout equal to the channel’s width. A downside break is currently preferred.

Full Report – GBP/AUD Outlook August 2014

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oz

After a stint on the sidelines, Reserve Bank of Australia Governor Stevens took the opportunity to resume attempts to talk the Aussie dollar down last week. It was a timely return given the recent surge, but is it enough to send it lower?

It was the first time the RBA governor had been so explicit about the value of the Aussie dollar since he talked of 85 US cents as ‘fair value’ at the end of last year, with some analysts saying the currency could be as much as 12 per cent overvalued. Of course, currencies rarely trade at ‘value’, with this very term being quite subjective and of little significance, anyway.

Australian rates on hold – so what’s new?

What I found most interesting about Stevens’ comments were not necessarily those blatant references to the currency, which the RBA can’t really control anyway, but his views on the economy and interest rates, which of course have a real bearing on the direction the currency trades.

He downplayed any negative impact from the budget, mentioned positive early signs of growth in non-mining activity, said monetary policy is already “very accommodative” with real cash rates “well below normal levels” and that low interest rates are working. These are hardly words of a governor that is actually considering reducing interest rates nearer to zero like Europe, the UK or the US.

All in all, I don’t think we got as much out of Stevens as the market has made out. He confirmed interest rates will remain on hold for an extended period. We knew this anyway.

Stevens needs Yellen

For the RBA to get its way and have the Aussie dollar trade back towards 85 cents, it really needs the greenback to rally. On that front the RBA has bought itself some time.
Stevens needs Yellen to do the heavy lifting — or should I say AUD selling — by providing some timeframe for an adjustment in US interest rates higher post QE tapering. Not likely any time soon.
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The RBA has made a lot of noise about the economic benefits of a lower Australian dollar recently and most businesses involved in the local tourism sector, and exporters in general, agree a lower currency would help them remain competitive.

Some manufacturers might beg to differ however. In theory a lower Aussie dollar can help make locally-manufactured goods more competitively priced compared to imported goods. In reality, things aren’t so simple.

A 10 per cent drop in the Aussie dollar will, eventually, make imported goods more expensive. Crucially though, this will not necessarily translate to a 10 per cent increase in business for the manufacturer. What it can do is actually increase costs by 10 per cent without a noticeable rise on the other side of the ledger.

Some OzForex clients are expressing a preference for a higher Aussie dollar given they import many raw materials that go into the manufacturing process.
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The Australian dollar has hit new record highs in recent months rising to a 28 year high against the pound sterling (GBP) and also against the Japanese yen (JPY). Despite speculation that the recent RBA interest rate drops would substantially impact its valuation, the strong Aussie dollar looks like it’s here to stay awhile. Australians can take advantage of favourable currency exchange rates by looking overseas for some great buys.
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How does the gyrations of the Aussie Dollar affect Shoppers, Travellers, Importers, Exporters, Manufacturers, Tourism operators, Educators?

Strong Australian dollar (above 0.90 USD):

Winners

Shoppers: Imports like electronics and cars should be cheaper in coming months if retailers pass on savings from new stock. Buying online from places like the US and UK will also become cheaper for consumers.

Travellers: Overseas holidays will be less expensive, with more buying power for everything from hotels to shopping. Airlines pay for fuel in US dollars so in theory fares should also be cheaper. Again, this depends on whether airlines pass on savings.
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The Australian dollar nursed its losses across the board today as investors pared long positions amid uncertainties about China’s economic growth and weakness in Asian stocks.

The dollar fell as far as $US1.0341, from $US1.0392 in New York, having lost 1 per cent this week. It was last at $US1.0368 and looked set to test last week’s trough of $US1.0336. A break there would take it to levels not seen since January 17.
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The mining boom is making Australia potentially wealthier, but also creating problems because of the high exchange rate. What should government policies be?

There are two issues, and it is very important that they are distinguished. One concerns taxes and the other concerns the exchange rate.

The aim of taxation is that some of the benefits of the boom go to the Australian community as a whole and not just to Australian shareholders and employees, and certainly not mainly to foreign owners. Taxation is probably the main channel (though not the only one) through which Australia benefits from the boom.
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Well, not if you are short the AUD because of all that hard landing business. Or, if you are an Australian exporter.

The Australian dollar has long been seen as a China/commodities trade, but Macquarie’s Brian Redican reckons that’s no longer the case. The currency is increasingly influenced by external factors, rather than the country’s own ever-growing mining sector, or its monetary and fiscal policy.

And this, he says, is a momentous shift — so much so that Macquarie now sees the AUD remaining around its current levels for several years, and only gradually sliding to $1.05 by 2015. Their previous forecast was a fall below USD parity by the end of this year.

Those external factors will sound familiar:

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The Australian dollar nursed losses against its US counterpart on Monday, weighed by uncertainty over China after the world’s second biggest economy posted a shocking trade deficit.

The shed around third of a cent to buy $US1.0526 in late trade, versus $US1.0567 in New York late Friday.

Traders cited selling from macro-funds, with talk of buying interest all the way down to $US1.0500.
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Joseph Capurso and Richard Grace of the foreign exchange team at Commonwealth Bank of Australia have conceded that their recent forecasts have been wrong.

They did not foresee that the ongoing sovereign debt crisis in the EU would have so little of a negative effect on global growth and therefore the commodities-linked Australian dollar.

The strategists have now amended their forecast for the exchange rate from $US0.95 in June 2012 to $US1.08 until September, and $US1.10 in early 2013.
AFR


Thursday, 13 September 2012 – Ozforex
———————————————-
Australian Dollar: The Australian dollar has remained supported in the mid 1.04’s and daringly undertook a challenge for 1.0500 as the primary funding vehicle for the euro-zone was given the all clear to partake in the Europe’s economic recovery. The market reaction was positive as investors took risk on board and closed out short positions with the Aussie rallying to highs marginally above $1.05 against the Greenback as a result. Settling back around similar levels to yesterday, the key focus today will be the outcome of the FOMC meeting in the US where many are keenly anticipating stimulus measure to be announced. If so this would have a positive effect on the Australian dollar as a result of the measures supporting global markets, as well as directly weakening the US Dollar as the underlying currency.

Feb 21, 2012 update:
————————————–
Joseph Capurso and Richard Grace of the foreign exchange team at Commonwealth Bank of Australia have conceded that their recent forecasts have been wrong.

They did not foresee that the ongoing sovereign debt crisis in the EU would have so little of a negative effect on global growth and therefore the commodities-linked Australian dollar.

The strategists have now amended their forecast for the exchange rate from $US0.95 in June 2012 to $US1.08 until September, and $US1.10 in early 2013.
Source AFR

Feb 09 2012 Lateline ABC Transcript
———————————–

TICKY FULLERTON, PRESENTER: The Australian dollar is set to remain a painful issue for large parts of the business community this year with all the signs so far indicating it will track higher rather than lower. So will there be any relief as 2012 unfolds?

Well in the third part of our week-long series, our experts tell us where they see the Aussie dollar heading this year.

MICHAEL BLYTHE, CHIEF ECONOMIST, CBA: Well our forecasts have the Aussie at parity with the US dollar at the end of 2012.

Now, the Aussie dollar’s performance has been one of the big surprises the last year or so. It’s been amazingly resilient given the global backdrop. In fact I’d just flown in from Mars and you’d told me the global story and asked for a currency forecast, I probably would have said about 70 cents.

Now, the Aussie’s not immune to what is going on. We think it will drift from around $1.07 today down towards that parity level at the end of 2012.

AUD/USD: 100 c

GERARD MINACK, CHIEF ECONOMIST, MORGAN STANLEY: I think it’ll be around 90 cents. The key driver of the currency is really global growth and commodity prices.

There are some other things that play a role, but that’s the big picture thing that drives it. And I think we’re going to see slower global growth, commodity prices come off, so I think the risks are the currency goes down, not up this year.

AUD/USD: 90 c

TIM HARCOURT, ECONOMICS PROFESSOR, UNSW: I’m picking at $1.07, just above parity.

I think it’s principally a story of the power proximity because China and India, Indonesia are demanding Australia’s resources, and for that reason I think the dollar will be strong and the rest of our fundamentals are closely tied to the emerging markets, where again, that’s where most of global growth’s gonna come from.

AUD/USD: 107 c

ALAN OSTER, CHIEF ECONOMIST, NAB: Well we think the Australian dollar where commodity prices are currently around will be good value at around about $1.01.

So we have the Australian dollar by the end of the year around parity. I think it’ll bounce up and down a bit in terms of weakness in essentially the US dollar because of quantitative easing being offset a little bit by further falls in commodity prices as we go through.

AUD/USD: 101 c

SCOTT HASLEM, CHIEF ECONOMIST, UBS: We’re looking for the Australian dollar to be around $1.05 against the US dollar at the end of the year.

In the near term, with the RBA lowering the cash rate and some more weakness coming through in the global economy, we do think the Australian dollar could lose some of its recent strength, maybe even head down towards parity again.

But again, over the course of the year with the global economy stabilising, looking a little bit better and the Australian economy looking a little bit better, we do expect the strong fundamentals of China growth, demand for triple-A-rated debt, which Australia has, is all gonna help the Australian dollar remain reasonably high.

AUD/USD: 105 c

TICKY FULLERTON: So the good news for exporters and import-competing businesses is that three of our four experts see the dollar falling this year.

The bad news is: not by much. Tomorrow night our experts will be turning their attention to a key indicator of the health of the economy, and that’s unemployment.

———————————
December 2011
———————————
As we approach year-end 2011 the Australian dollar is hovering around parity. So armed with the clarity of hindsight we re-visit our selected analysts forecasts from back in May 2011, some of their predictions are doing better than others… So far Matthew Sherwood from Perpetual and Nigel Stapledon, UNSW are looking the most on the money correctly predicting an AUDUSD rate of around 99 cents. But given the volatility of the AUD this year, with a month to go any one of them may still be in with a chance.


Source for following predictions: Australian Financial Review May 7-8, 2011

Commonwealth Bank currency strategist Richard Grace says the local dollar will get to $US1.12 by September driven by the terms of trade boom, and by increasing interest from foreign investors in diversifying into currencies other than the greenback.

National Australia Bank John Kyriakopoulos is slightly more cautious. Although after its recent surge he upped his short term forecasts by as much as 4 cents, he believes the local dollar will fall to $US1.02 by year end. He says the currency appears expensive at $US 1.10, based on measures such as the terms of trade and the current account.

ANZ Bank says its official Australian dollar year-end forecast is $US1.03. It sees the currency at par with the greenback until at least July 2012 and says weakness in the US dollar is likely to persist owing to America’s low interest rates, large fiscal hole and ailing housing market.

JPMorgan economics team local currency year-end forecast of $1.04. It believes the underlying fundamentals appear strong, and the dollar will hold above parity until the end of 2012, when the US Federal Reserve is likely to begin raising interest rates.

Citibank analysts say the Australian Dollar is overvalued by about 6 per cent. they believe that while the currency may go higher in the short term, it is difficult to make the case to long-term investors for buying the dollar at present values.



Source for following predictions: ABC Lateline – Experts revisit AUD predictions, May 11 2011

Andrew Pease, Russell Investments We’re still fairly cautious about the outlook for the rest of the year and we do think it will end the year weaker, potentially below 90 cents.

And the reasons why we think that are the case by the end of this year, I think the markets will start to be looking at the timing of the first American rate rise, and also we think that commodity markets have probably run too hard and with China slowing we’ll see commodity markets come back quite a bit.

Nicki Hutley, KPMG We’ve already seen the ECB start to nudge up rates and sooner or later the Federal Reserve is going to have to get of its hands and do likewise. We are seeing quite pronounced recovery there and that will gather momentum and we all know the Fed is, if nothing else, very hawkish on inflation, so they will act.

And I think that will make a psychological change to the market, bring about that psychological change that will see a shift back down to 90 cents by the end of the year.

Besa Deda, St George Bank We’re looking for the Aussie dollar to finish the year at $1.02. That is a little bit lower than where it’s currently trading. The main reason is that we are forecasting slower growth in the Chinese economy and we do think that commodity prices will peak in the second quarter of this year. Also, interest rates in other major economies are starting to move higher or will start to move higher in 2012 and the currencies of those economies will start to price that in and that will pressure the Aussie dollar lower against these currencies.

Nigel Stapledon, UNI. OF NSW My feeling in the second half of the year is that the balance of news is – it’s a lot more even. I think there’s a fair probability that the news on the US will continue to get a little bit better, but it’s a little bit more problematic about China and the net balance of that could be slightly negative for the Aussie dollar. So, I’d be pretty comfortable with a forecast of around sort of 99 cents, a dollar.

Matthew Sherwood, Perpetual I continue to expect the Australian dollar will depreciate against the US down to around 99 US cents. And the reason for that is a very solid US recovery is brewing at the moment and core inflation in the US economy is clearly rising. And as a result, I tend to think that’s going to bring the US Federal Reserve out of its trenches earlier than market expectations.

Now, whilst being hawkish on the US Fed has not been a policy which has rewarded investors in the past six months or so, my suspicion is we’re seeing the clear signs of a very solid and sustainable recovery in the US, and because of that, the US dollar would be expected to rally.


Feb 21, 2012 update:
————————————–
Joseph Capurso and Richard Grace of the foreign exchange team at Commonwealth Bank of Australia have conceded that their recent forecasts have been wrong.

They did not foresee that the ongoing sovereign debt crisis in the EU would have so little of a negative effect on global growth and therefore the commodities-linked Australian dollar.

The strategists have now amended their forecast for the exchange rate from $US0.95 in June 2012 to $US1.08 until September, and $US1.10 in early 2013.
Source AFR

Feb 09 2012 Lateline ABC Transcript
———————————–

TICKY FULLERTON, PRESENTER: The Australian dollar is set to remain a painful issue for large parts of the business community this year with all the signs so far indicating it will track higher rather than lower. So will there be any relief as 2012 unfolds?

Well in the third part of our week-long series, our experts tell us where they see the Aussie dollar heading this year.

MICHAEL BLYTHE, CHIEF ECONOMIST, CBA: Well our forecasts have the Aussie at parity with the US dollar at the end of 2012.

Now, the Aussie dollar’s performance has been one of the big surprises the last year or so. It’s been amazingly resilient given the global backdrop. In fact I’d just flown in from Mars and you’d told me the global story and asked for a currency forecast, I probably would have said about 70 cents.

Now, the Aussie’s not immune to what is going on. We think it will drift from around $1.07 today down towards that parity level at the end of 2012.

AUD/USD: 100 c

GERARD MINACK, CHIEF ECONOMIST, MORGAN STANLEY: I think it’ll be around 90 cents. The key driver of the currency is really global growth and commodity prices.

There are some other things that play a role, but that’s the big picture thing that drives it. And I think we’re going to see slower global growth, commodity prices come off, so I think the risks are the currency goes down, not up this year.

AUD/USD: 90 c

TIM HARCOURT, ECONOMICS PROFESSOR, UNSW: I’m picking at $1.07, just above parity.

I think it’s principally a story of the power proximity because China and India, Indonesia are demanding Australia’s resources, and for that reason I think the dollar will be strong and the rest of our fundamentals are closely tied to the emerging markets, where again, that’s where most of global growth’s gonna come from.

AUD/USD: 107 c

ALAN OSTER, CHIEF ECONOMIST, NAB: Well we think the Australian dollar where commodity prices are currently around will be good value at around about $1.01.

So we have the Australian dollar by the end of the year around parity. I think it’ll bounce up and down a bit in terms of weakness in essentially the US dollar because of quantitative easing being offset a little bit by further falls in commodity prices as we go through.

AUD/USD: 101 c

SCOTT HASLEM, CHIEF ECONOMIST, UBS: We’re looking for the Australian dollar to be around $1.05 against the US dollar at the end of the year.

In the near term, with the RBA lowering the cash rate and some more weakness coming through in the global economy, we do think the Australian dollar could lose some of its recent strength, maybe even head down towards parity again.

But again, over the course of the year with the global economy stabilising, looking a little bit better and the Australian economy looking a little bit better, we do expect the strong fundamentals of China growth, demand for triple-A-rated debt, which Australia has, is all gonna help the Australian dollar remain reasonably high.

AUD/USD: 105 c

TICKY FULLERTON: So the good news for exporters and import-competing businesses is that three of our four experts see the dollar falling this year.

The bad news is: not by much. Tomorrow night our experts will be turning their attention to a key indicator of the health of the economy, and that’s unemployment.

———————————
December 2011
———————————
As we approach year-end 2011 the Australian dollar is hovering around parity. So armed with the clarity of hindsight we re-visit our selected analysts forecasts from back in May 2011, some of their predictions are doing better than others… So far Matthew Sherwood from Perpetual and Nigel Stapledon, UNSW are looking the most on the money correctly predicting an AUDUSD rate of around 99 cents. But given the volatility of the AUD this year, with a month to go any one of them may still be in with a chance.


Source for following predictions: Australian Financial Review May 7-8, 2011

Commonwealth Bank currency strategist Richard Grace says the local dollar will get to $US1.12 by September driven by the terms of trade boom, and by increasing interest from foreign investors in diversifying into currencies other than the greenback.

National Australia Bank John Kyriakopoulos is slightly more cautious. Although after its recent surge he upped his short term forecasts by as much as 4 cents, he believes the local dollar will fall to $US1.02 by year end. He says the currency appears expensive at $US 1.10, based on measures such as the terms of trade and the current account.

ANZ Bank says its official Australian dollar year-end forecast is $US1.03. It sees the currency at par with the greenback until at least July 2012 and says weakness in the US dollar is likely to persist owing to America’s low interest rates, large fiscal hole and ailing housing market.

JPMorgan economics team local currency year-end forecast of $1.04. It believes the underlying fundamentals appear strong, and the dollar will hold above parity until the end of 2012, when the US Federal Reserve is likely to begin raising interest rates.

Citibank analysts say the Australian Dollar is overvalued by about 6 per cent. they believe that while the currency may go higher in the short term, it is difficult to make the case to long-term investors for buying the dollar at present values.



Source for following predictions: ABC Lateline – Experts revisit AUD predictions, May 11 2011

Andrew Pease, Russell Investments We’re still fairly cautious about the outlook for the rest of the year and we do think it will end the year weaker, potentially below 90 cents.

And the reasons why we think that are the case by the end of this year, I think the markets will start to be looking at the timing of the first American rate rise, and also we think that commodity markets have probably run too hard and with China slowing we’ll see commodity markets come back quite a bit.

Nicki Hutley, KPMG We’ve already seen the ECB start to nudge up rates and sooner or later the Federal Reserve is going to have to get of its hands and do likewise. We are seeing quite pronounced recovery there and that will gather momentum and we all know the Fed is, if nothing else, very hawkish on inflation, so they will act.

And I think that will make a psychological change to the market, bring about that psychological change that will see a shift back down to 90 cents by the end of the year.

Besa Deda, St George Bank We’re looking for the Aussie dollar to finish the year at $1.02. That is a little bit lower than where it’s currently trading. The main reason is that we are forecasting slower growth in the Chinese economy and we do think that commodity prices will peak in the second quarter of this year. Also, interest rates in other major economies are starting to move higher or will start to move higher in 2012 and the currencies of those economies will start to price that in and that will pressure the Aussie dollar lower against these currencies.

Nigel Stapledon, UNI. OF NSW My feeling in the second half of the year is that the balance of news is – it’s a lot more even. I think there’s a fair probability that the news on the US will continue to get a little bit better, but it’s a little bit more problematic about China and the net balance of that could be slightly negative for the Aussie dollar. So, I’d be pretty comfortable with a forecast of around sort of 99 cents, a dollar.

Matthew Sherwood, Perpetual I continue to expect the Australian dollar will depreciate against the US down to around 99 US cents. And the reason for that is a very solid US recovery is brewing at the moment and core inflation in the US economy is clearly rising. And as a result, I tend to think that’s going to bring the US Federal Reserve out of its trenches earlier than market expectations.

Now, whilst being hawkish on the US Fed has not been a policy which has rewarded investors in the past six months or so, my suspicion is we’re seeing the clear signs of a very solid and sustainable recovery in the US, and because of that, the US dollar would be expected to rally.


Australia’s unemployment rate unexpectedly dropped in January, sending the dollar jumping as the chances of another interest rate cut receded further.
The country’s jobless rate eased to 5.1 per cent last month from 5.2 per cent in December. Analysts had tipped the rate would increase to 5.3 per cent.

The Australian dollar immediately rose more than a third of a US cent to $US1.073 in the wake of the figures. Investors viewed the likelihood of a rate cut in March at about a one-in-three chance prior to the ABS data, a ratio that’s likely to sink as they digest the better-than-expected job numbers.
“There’s very little likelihood of a rate decline in the immediate future without some big negative shock coming out of Europe,’’ said Citi’s Mr Williamson.

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The Reserve Bank’s surprise move to leave its key cash rate unchanged propelled the Australian dollar to record highs yesterday.

The dollar leapt to 82.38 euro cents against the euro zone currency and touched 68.3 pence, a 27-year high against the British currency. Within minutes of the RBA’s decision, the Aussie jumped almost a cent to US108.1¢. Last night it was trading at US107.99¢, up from US107.25¢ on Monday.

The Reserve Bank’s decision to hold rather than cut rates was interpreted to mean the RBA was more confident about the economy than many had anticipated.
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Australian borrowers will have to wait for at least another month for more interest rate relief after the Reserve Bank surprised pundits by leaving its key rate unchanged.

The Reserve Bank today kept its cash rate at 4.25 per cent, defying expectations of a third rate cut in a row.

The dollar rocketed on the news, jumping about one US cent to $US1.081 within minutes of the announcement.

“It’s a pretty big surprise,” said Market Economics managing director Stephen Koukoulas. “They were obviously very close to cutting interest rates and decided not to.”

“They put a huge amount of weight on what’s happening in the mining sector by the looks of this,” he said. “So we’ll see whether it’s mining versus the rest of the economy – who wins out?”
The central bank took heart from recent signs that the US economy is picking up growth and receding concerns about the European debt crisis.

“Recent data from the United States suggest a continuing moderate expansion after a soft patch in mid 2011,” RBA Governor Glenn Stevens said in a statement accompanying the decision. “Growth in China has moderated as was intended, but on most indicators remained quite robust through the second half of last year.”

The RBA’s decision may take the heat off the country’s major banks – at least for now. Several of the banks had indicated that they may not pass on another rate cut by the central bank because their own borrowing costs continue to rise.

Most economists had predicted the RBA would slice another 25 basis points off the cash rate today. The consensus may now focus on the central bank’s March meeting for that cut to take place.


The professional punters may be divided about which direction the Reserve Bank will jump today, but there are 107 good reasons why our central bank should cut interest rates again. All relate to the strength of the Aussie dollar. Let’s explore just a few of them.
Late last year, when our central bank began shaving interest rates, it was swayed by the potential for chaos on global markets and the need to soften monetary policy settings just in case the worst eventuated.

But it was a close call, particularly the December cut.

According to the minutes from its December 6 meeting, the domestic economy was chugging along nicely and our major trading partners were shipshape. On that basis, alone, it considered there was no need to cut rates of 4.5 per cent, which it considered just about right.

It cut them anyway, to 4.25 per cent, as the storm clouds gathered over Europe.

Many would argue now that there is less reason to cut rates again. In the two months since the last meeting, the perception is that the danger levels have receded. Wall Street has resumed its march northwards, to its highest level since 2008, employment in the US has just experienced its first solid jump in years, and the Europeans appear to be muddling through their debt crisis.

Despite the appearance of a more benign climate in the developed world, credit conditions on global markets remain tight. While there has been some easing in the past six weeks on European debt instruments, bond traders are far more nervous than their cousins in the equity markets.

If you need to bet on which is correct, it is always wise to opt for the guys in control of the money instead of those selling the stocks.

This morning, the debate is likely shift more to domestic factors, which have begun to overshadow global events, dominated by the strength of the local currency and the impact it is having on the economy.

With a once-in-a-generation resources boom in full swing and continued growth in China and our other Asian trading partners, the dollar can head only upwards.

The Aussie dollar will be stronger for longer. There is no doubt about that. And that strength will provide the mechanism to reshape the economy, squeezing investment out of industries that can no longer compete.
But there is good reason to believe it has been pushed to artificially inflated levels by the manipulation of both American and European central banks that have slashed their interest settings to just above zero in an effort to drive their currencies lower.

At 4.25 per cent, our interest rates are at a huge premium to almost every other developed nation. Throw in a triple-A credit rating, and the Aussie dollar – once considered the peso of the Pacific – suddenly has been transformed into Popeye. What not so long ago was among the world’s most volatile currencies suddenly has achieved safe haven status.

Everyone wants a slice of the action. And who can blame them? Borrow euro, buy Aussie. It’s a no brainer.

Add to the equation the fundamental reason our dollar is strong – the vast inflow of investment funds to build and expand resource projects coupled with record shipments of raw materials – and reining in the Aussie will be no easy task.

But narrowing that interest rate differential with Europe, the US – and by association China – and Japan, may go some way to achieving it.

The threat of inflation, which dominated discussion around the Reserve Bank boardroom last year, clearly has receded.

The most recent official figures showed an annual rate of 3.1 per cent for the December quarter. More importantly, underlying inflation – the RBA’s preferred measure – was sitting at about 2.6 per cent. That’s well within the 2 to 3 per cent targeted range.

Job creation also has stalled as the currency strength cut a swath through import-competing industries, forcing many to sack workers.

While the headline unemployment rate, at 5.2 per cent, was among the best in the developed world, job growth was the worst since the Bureau of Statistics began compiling the figures in 1992.

Add to that yesterday’s consumer spending numbers. Retail remains weak, so weak in fact that in the lead-up to Christmas, it contracted from even the paltry levels of December 2010.

Annual retail sales grew by just 2.4 per cent last year, down from a 2.5 per cent rise the previous year. That was the weakest growth rate in 27 years. And again, that record only exists because 1984 was the year the bureau began compiling the statistics.

If the Reserve Bank needs any further convincing, it will come this week as the half-yearly profit season cranks into gear. The universal thinking is that this year will be tough.