Australian dollar to crack 80 US cents: Deutsche Bank

21 Feb 07:41 AM
Michael Heath
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Australia's resurgent exports could push its currency to US80¢ and even beyond, Deutsche Bank's chief economist Adam Boyton reckons.

The nation's shrinking current-account deficit, which has been driven by a surge in commodity prices, means Australia now only needs about a third of the capital it required a year ago to cover the shortfall, says Boyton. The relative appeal of the nation's bonds -- seen in the difference between Australian and US yields - suggests that capital will keep coming in. Any inflows surplus to the current-account's smaller requirements will put upward pressure on the currency, which has surged 6.5 per cent this year.

The Australian dollar clears the US77c mark, its highest since the US election. Vision courtesy: ABC News 24.

The Australian dollar hasn't been above US80¢ since May 2015.

 "In essence we are comparing export-driven movements in the current account deficit to interest rate differentials; arguing that an export-driven narrower current account, for any given interest rate differential, should see a higher Australian dollar,'' Boyton said in a research note on Monday.

 

"Our construction is not only highly correlated with the Australian dollar, but in fact tends to lead movements in the currency."

Australia's current account narrowed to 1.5 per cent of gross domestic product last quarter from 5.5 per cent a year earlier, Boyton estimates, and he expects further improvement in the first three months of this year. A narrowing of that scale normally comes when the domestic economy is moribund and demand for imports collapses; but this time it's the result of surging prices for iron ore and coal.

Deutsche estimates Australian exports as a share of GDP were 21.2 per cent in the fourth quarter of last year, and will climb to about 22 per cent in the first three months of this year. The jump combined with the prevailing interest rate differential suggests risk of further upside in the Australian dollar toward and indeed above US80¢,'' said Boyton.

Boyton doubts the Australian dollar will make it all the way to the mid-80s against the US dollar. Such a strong appreciation would likely wind up hurting the domestic economy and require the Reserve Bank of Australia to cut interest rates in response, impacting yields.

RBA governor Philip Lowe earlier this month signalled a level of comfort with the currency, which has bought between US76¢ and US77¢ during February. He said the central bank bases its judgment on whether a configuration of interest rates and currency delivers reasonable growth. Given the RBA is forecasting a 3 per cent expansion, it's ``hard to say'' the exchange rate is ``fundamentally too high,'' Lowe said.

The sole breakdown in Boyton's theory came during the global financial crisis. He blames the "extreme risk aversion at the time'' and Australian commodity export prices being based on longer-term contracts that lagged the turn in the global economy.

 

Read more : http://www.smh.com.au/business/markets/currencies/australian-dollar-to-crack-80-us-cents-deutsche-bank-20170220-guhc6h.html