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Aussie to rise to US92 next year: Westpac

PRINT 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 RBA
Australian dollar returns to near four-year low
RBA takes aim at Japans currency devaluation
Though Reserve Bank Australia chief Glenn Stevens is doing all he can to talk the dollar down, Westpac Banking
Corporation, 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 Treasuries
wont narrow even as the US Federal Reserve moves to raise its benchmark interest rate. Westpac believed
investors 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 most
overvalued after the kiwi, will go lower. Policymakers said four times this month the Aussie remains high enough
to slow the economy as the Reserve Bank maintains record-low benchmark rates. The local dollar has
appreciated about 5 per cent this year, the most after the greenback among 10 developed-market currencies
tracked by Bloomberg Correlation-Weighted Indexes.
The failure of US yields to rise in response to decent economic data does raise more serious questions about
whether 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 the
US dollar.
Westpac predicts the Aussie will climb to US88 next month, from 86 at 7.39pm AEDT. The currency is set to
strengthen further to US90 in June and US92 at the end of next year, Mr Callow wrote in an email on
Wednesday.
Policymakers are fretting over a disconnect between the currency and falling commodity prices, led by a more
than 40 per cent drop in iron ore, the nations biggest export. In trade-weighted terms the Aussie was higher at the
end of last month than in January despite declines in key commodity prices since then, the RBA is recorded as
saying in minutes of its November 4 meeting.

Iron ore extended a tumble to its lowest price in more than five years this week as declining home prices in China
added 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, said
yesterday. 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 Markit
Economics was at 50.0, below the median estimate of 50.2 in a Bloomberg News survey and lower than last
months 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 the
third 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 next
year, 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, fuelling
optimism over demand, Mr Callow said. Spot iron ore prices are set to recover to $US100 per tonne in the first
quarter, from $US80 tonne at the end of the year, according to Westpac. Global economic growth is set to
accelerate 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 the
past 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 the
end of the year, it is set to widen to around 90 basis points in 2015, according to analysts surveyed by
Bloomberg. At 3.27 per cent, Australian benchmark yields are among the highest for developed nations, with only
debt from Greece, Iceland and New Zealand surpassing them.
Treasury yields showed limited reaction this month to strong US economic data, including better-than-expected
retail 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 Fed
increases 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 creating
ever more liquidity.
The RBA is right to be concerned that the BOJs expanded easing will help keep the Aussie higher than
fundamentals 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 monthly
inflows 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 on
November 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 will
also rise, so over-valuation will not necessarily grow.
Bloomberg

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Financial Markets/Foreign Exchange Markets, Economy/Monetary Policy, Economy

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