The Australian dollar has the potential to fall further and faster over the next 18 months, possibly reaching a level around US86c by the end of this year, and as low as US80c by the end of 2014, National Australia Bank says in a forecast released yesterday.
NAB’s new currency projection replaces a June forecast that included an end-of 2013 estimate for the AUD/USD rate to US88c, falling to US83c by the end of next year.
“Back then our view was that the Reserve Bank of Australia interest rate easing cycle was likely to be completed with a move down in the cash rate to 2.5 percent, and with a tightening cycle potentially commencing late in 2014,” NAB analyst Ray Attrill said.
“We now envisage at least one further rate cut in this cycle (likely to be to 2.25pc) with risk skewed to an even lower cycle end-point,” he said.
“That view is supported by the economic projections contained in a new RBA Statement of Monetary Policy – and with no tightening expected before 2015 at the earliest. This is part of the justification for now forecasting a somewhat deeper and faster A$ depreciation path,” Mr Attrill said.
NAB anticipates that the RBA will lower the cash rate to 2.25pc in November, but warned that in the interim there could be some improvement in economic data, following the Federal Election, which could dilute rate cut expectations.
Other influences could be the expected completion of the US bond buying program in the first half of next year, and US rates markets moving to more confidently price in a commencement of a US interest rate tightening cycle in 2015.
Shorter-term, however, NAB expects the A$ to rise to perhaps around US93c at the end of September, due to short positioning amongst the speculative trading community, a pickup in industrial metals prices off their recent lows and a fall-back in market volatility.
Further slippage in the A$ value against European currencies is also expected by NAB, identifying some ‘discernible green shoots of Eurozone recovery’, although this may be limited by the likelihood of the European Central Bank and Bank of England pushing back against stronger growth, impacting on policy tightening expectations.
Meanwhile the comparison between the A$ and the Japanese Yen is seen as likely higher, as the US currency appreciates.
Currency movement has big impact on producer returns
Beef exporter Richard Rains, from Sanger Australia, made some comments about currency value and its impact on producers during his address last week to the Queensland Rural Press Club Ekka breakfast.
“The dollar has a massive impact on what a producer receives for his or her cattle,” he told the gathering.
“Every cent in movement in the A$ is worth the equivalent to $45 million to the cattle producer,” Mr Rains said.
“It’s been a wild ride over the past decade or so, with the A$ falling to US55c back in 2001 before rising to US110c in 2010, and just below 90c today.”
“The feeling is the dollar is heading further down, and hopefully if that happens, it will produce greater rewards for the producer. God knows, they deserve it.”
But Mr Rains stressed that, just because the dollar value changed, it did not necessarily mean exporters could sell Australian beef for any more money in the international market.
“We’re trying to attract the best price every single day, although for better or for worse, the rate of the dollar affects that price considerably, as importers want a share of the change,” he said.
Mr Rains expressed some concern about monetary easing practises being employed by governments around the world.
“The US today is printing 85 billion additional dollars every month; Europe the same amount; and Japan even more. There’s just a sea of money out there, and littler wonder the A$ has been so strong, with all that money floating around the world trying to find a place where they can get a decent return.”
If the US economy continued to improve, some of that money might shift into that market, he said.
“I’m hopeful that we might see a weaker Aussie dollar, but it has a mind of its own,” Mr Rains said.