The Australian dollar is now seen trading at fair value, economists say

fair trading dollarAnalysts expect the dollar to range between US68c and US80c by the end of the year. Photo: James Davies







The Australian dollar is unlikely to drop much between now and the end of the year, according to a survey of 25 market, academic, independent and industry economists, most of whom say the local unit is close to fair value now.

Estimates range from US68¢ to US80¢, with the average coming in at US73.8¢. This compares with US76.3¢ in late trade on Thursday.

“Fair value” normally reflects calculations based on Australia’s terms of trade – the price of exports versus imports – and the difference between government bond yields in Australia and the United States. Some economists broaden this model by adding movements in the price of key global commodities such as gold, and changes in other indices. The fortunes of China, Australia’s biggest trading partner, and possible market shocks unleashed by Greece’s current debt woes are two unknowns that could upset current estimates.

David Bassanese from BetaShares is the most bearish on the Aussie’s performance over the next six months, seeing it at US68¢ by December 31, and then even lower at US65¢ by this time next year.

In keeping with this, he also expects the Reserve Bank of Australia to cut interest rates further, from 2 per cent now to 1.5 per cent by the end of the year. He forecasts the cash rate to remain at this level at least until June 30 next year.

Asked in the survey whether or not the Australian dollar had hit “its new equilibrium”, Mr Bassanese was adamant.

“Not at all,” he said.

Asked what might “disrupt” that and in “what” direction, he cited weak commodity prices and interest rate differentials.

 “We expect the Australian dollar to decline further due to the likely further decline in local interest rates, higher interest rates in the United States, and continued weak export commodity prices,” he said.

At the other end of the survey’s spectrum is Market Economics’ Stephen Koukoulas, who sees the Aussie rising to US80¢ by the end of the year, and to US83¢ by the end of June, 2016. Not surprisingly, he is a lot more bullish on the RBA’s monetary policy, expecting the cash rate to remain on hold this year before a series of increases, to 3.5 per cent, by the end of June next year.

“The equilibrium changes every day,” he said.

 “As commodity prices tick up today or interest rates tick down somewhere in the world, the value of the Aussie dollar changes.

“On current fundamentals, the Aussie dollar around US77¢ seems about fair value,” Mr Koukoulas said.

Former Bank of America Merrill Lynch senior economist Saul Eslake also expects the RBA to start increasing interest rates, predicting a quarter-point hike, to 2.25 per cent, by the end of the year. He also sees the cash rate at 3.75 per cent this time next year, the highest among all the respondents.

Despite this, he sees the Australian dollar slipping to US70¢ by the end of the year, and even further, to US65¢, by the end of June, 2016.

“I think the Australian dollar has quite a bit further to fall, into the mid-60s by this time next year,” he said.

 “If the [US Federal Reserve] doesn’t start raising rates later this year, or if there is some other major ‘shock’ to the global financial system which further enhances the Australian dollar’s ‘safe haven’ status, then that fall could be delayed,” he said.

Closest to the average are RBC Capital Markets’ Su-lin Ong and  Alan Oster from National Australia Bank, who both the Aussie at US74¢ by the end of the year, edging slightly down to US73¢ by the end of the financial year just started.

“The generally tight range of the currency since the start of 2015 reflects a number of competing factors, rather than a ‘new equilibrium’,” said Ms Ong, who added that “the fundamentals continue to suggest more downside from current levels.”

She lists more aggressive monetary tightening by the Fed, any positive commodity price surprises and signs that the RBA has finished cutting the cash rate as disruptive to her own forecasts.

Alan Oster agrees, saying any changes to his current forecasts would be influenced by events outside Australia.

Uncertainty over Greece or China (lower commodity prices), or a sooner-than-expected ‘lift-off’ in US interest rates could assert additional downward pressure on the Australian dollar,” he said.

 “In contrast, a delay in Fed tightening, unforseen Chinese stimulus or an amicable resolution to the Greek situation could push the Aussie higher.”


The Sydney Morning Herald