Wednesday, May 28, 2008

The ever-stronger Aussie - within sight of US$1.04

The ANZ Bank says fair value would be US$1.12

The ANZ Bank has sharply revised up its forecasts for the Australian economy predicting at least one - and probably two - more official interest rate hikes before the end of the year.

The forecasts spell trouble for the Rudd government whose leader Kevin Rudd yesterday took responsibility for interest rate moves by telling Parliament that his Budget had “put downward pressure on interest rates”.

The ANZ has revised up its forecast for inflation, expecting it to reach a new long time peak of 4.9 per cent in the second half of this year prompting the Reserve Bank to push up interest rates in August and again in November.

The two hikes would take the money market cash rate to 7.75 per cent - one of the highest in the developed world, and take standard variable mortgage rates to 10 per cent.

They would add weight to criticism that the Budget didn't cut spending nearly hard enough to make inroads on inflation and forestall further interest rate rises...

The ANZ's predictions are stronger than those made by other banks.

Westpac and National Australia Bank say rates will stay on hold this year, while the Commonwealth Bank is tipping one rise of 0.25 per cent.

The good news to flow from the ANZ's new forecasts would be a much higher Australian dollar, so high that the Bank says it itself should put downward pressure on inflation.

The bank expects the Australian dollar to climb above its post-float peak of 96.5 US cents and then to US$1.00 and then to US$1.04 before the year's end.

In a briefing note sent to clients late yesterday the bank's Head of Foreign Exchange and International Economics Research Amy Auster said that the Australian dollar should outperform most currencies in the world in the next 6 to 12 months, because Australia would be the only OECD country in which interest rates were on the way up “thanks to a home-grown inflation problem and booming terms of trade”.

This month's budget papers forecast an extra 20 per cent hike in Australia's terms of trade this year on top of the 40 per cent rise over the last four years.

The Australian dollar closed yesterday near to 96 US cents, a 24-year high.

The ANZ's briefing note says that 96.5 US cents is the next hurdle and that “a move above this level would reinforce the view that the Aussie can move to levels comfortably above US$1.00.”

The bank says that the Australian dollar has been above US$1.00 in the past, before it was floated in 1983. In the early 1980s it climbed past US$1.18 and in 1973 climbed past US$1.47.

“We are not arguing for a move back to these highs, but we think a move above US$1.00 would see some follow-through,” the briefing note says.

The Bank's “fair value” model which predicts where the Australian dollar should be on the basis of fundamentals points to a US$1.12 Australian dollar before the end of the year, although the bank says that “in recent months, the dollar has traded at a discount to our fair value model.”

A study released yesterday by unions including the Community and Public Sector Union and the Finance Sector Union warns that the high dollar will continue to encourage the hollowing out of Australian employment as banks and other firms shift their back-office operations offshore.

Based on modelling conducted by the National Institute of Economic and Industry Research it predicts that 850,000 jobs are at risk over the next 20 years – one in ten of all service sector jobs.