Jonathan Cavenagh, Currency Strategist at Westpac, on AUD/USD and AUD/JPY
How would you evaluate the current performance of the Australian Dollar versus the US Dollar and Japanese Yen?
In recent weeks the Australian Dollar has been fairly resilient against both currencies. There are several reasons behind this: the domestic story in Australia is probably not being as bearish as what people have been expecting, with the consumer confidence advancing. However, more importantly, is that the Chinese economy is stabilizing and coming out of the downturn we saw in the earlier part of this year. That helped put iron ore prices higher, which is a big driver of Australia's terms of trade. Few months ago we were looking at a quite nasty fall in the Australian terms of trade and that is slowly getting revised up, as iron ore prices recover on the back of more optimism that Chinese economic growth is much closer to a trough point and is likely to look much healthier in the first half next year, compared to 2012.
Do you think the Reserve Bank of Australia will cut the rates in the nearest future?
We are expecting interest rates cuts in November and then we anticipate another cut in the first quarter of the next year, either in February or March. I guess, the rationale for that is when we see the terms of trade, commodity prices and etc. falling as much as they have declined; the pressure on the currency is mounting. However, given the extraordinary circumstances in Europe and the U.S., where the central banks expand their balance sheets very rapidly, the Australian Dollar has taken on some sort of a safe-haven status, thus assets within Australia, particularly Commonwealth Government Securities, currently are very popular among investors. That is keeping the currency stronger, and essentially the RBA is having more heavy lifting to do in terms of supporting the economy, as the terms of trade cool.
What are your forecasts for AUD/USD and AUD/JPY pairs’ performances by the end of this year?
We do have the Australian Dollar lower against the U.S. dollar by the end of this year; the pair is expected to fall to 1.01, before rebounding to 1.06 by the middle of the next year. Thus, we still think that the terms of trade, which is clearly coming off the boil in Australia, combined with another couple of interest rates cuts, are likely to push AUD/USD down to the 1.01level.
From the Yen perspective, we think AUD/JPY should probably be around a 80.79level by the end of the year as well, again reflecting those factors. The Aussie Dollar should weaken from here against the both currencies over the next two and a half months.