surge to a new 17-year high of 83.35 US cents late on Friday has sent bankers scurrying to update their forecasts, with one now speaking of an 88 US cents dollar.
Westpac issued urgent advice to its clients saying that whereas it has treated the 80-US cent mark as “an elastic but relatively binding ceiling for the currency, recent events have disproved that theory”.
The Australian dollar has been climbing against both the US dollar and the Japanese yen for six consecutive weeks, gaining 8 per cent against the dollar and 10 per cent against the yen. On Friday it hit 99.02 yen, its highest level in a decade.
Our dollar is being driven up in part by record high commodity prices that show no sign of easing and in part in reaction to emerging signs of weakness in the US economy.
TD Securities has told its clients that so high have commodity prices climbed that if the Australian dollar had maintained its traditional relationship to them it would by now by worth “around $US 1.40”. On this basis it says it believes that at its current level of around 83 US cents the Australian dollar “is probably still under-valued”...
Takeover bids already underway for Australian corporations including Qantas, Rinker and Coles are expected to boost the foreign demand for Australian dollars by up to $60 billion if as expected the money is largely sourced from overseas.
Also at issue is the future of Australian interest rates, already amongst the highest in the developed world. Australian rates are currently 1 percentage point above US rates and 5.75 points above Japanese rates.
Traders expect a further rate hike in Australia within weeks. Betting on futures markets points to a 63 per cent chance of a rate hike after the Reserve Bank board next meets on May 1.
The Commonwealth Bank says if that happens the Australian dollar could climb as high as 85.5 US cents.
TD Securities has told clients that 88 US cents is possible over the next 12 months if, as it expects, interest rates climb further still.
It sees the May 8 Budget as a risk to inflation, “especially if the government spends or gives away the bulk of the budget surplus”.
TD’s global strategist Stephen Koukoulas has told his international clients that the Australian government “has form in terms of beefing up spending and giving tax cuts ahead of elections.”
“The government is well behind in the polls and is the outsider in all the betting markets on the election. This means that Budget surpluses close to $A15 billion in both 2006-07 and 2007-08 are likely to be directed at buying votes. This is perfectly understandable, but there are consequences for the economy and other arms of policy. Given that inflation is already high and growth is strong, a pro-cyclical easing in fiscal policy runs the risk of forcing the Reserve Bank to hike more than once.”
The government’s mid-year economic outlook forecast a budget surplus of 11.8 billion in 2006-07 and 9.7 billion in 2007-08.
In an interview from London with the ABC’s Lateline program on Thursday night the Treasurer Peter Costello appeared to acknowledge that eating in to these surpluses would put further pressure on interest rates and the Australian dollar saying that “if you went out and spent $10 billion, I have no doubt that would put a lot of pressure on the financial markets.”