Aussie dollar to hit US85?? in 2018

A continued slide in the greenback could see the Aussie dollar push as high as US85?? by the end of next year, analysts at Commonwealth Bank say.

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The bullish call coincides with a fresh push in the local currency towards US80?? on Wednesday following a much stronger than expected construction data for the June quarter. The Aussie fetched US79.9?? in afternoon trade.

CBA’s call for the Aussie to buy US85?? by the end of 2018 is above the median economist forecast of US80??, on Bloomberg numbers.

Weakness in the US dollar explains much of this expected strength in the local currency, CBA chief currency strategist Richard Grace said in a note to clients, as trends that were apparent in late 2016, but which were knocked off course by the shock election of Donald Trump as US President, reassert themselves.

Mr Trump’s electoral victory in November had seemed a watershed moment for the world’s pre-eminent currency.

Analysts and investors bet the Republican-dominated Congress would give the green light to tax cuts, more spending on infrastructure and other stimulatory policies.

Correspondingly, the perception was that money flowing back into a rejuvenated American economy would push the US dollar higher in 2017. Pro-growth policies

“We had temporarily changed our US dollar depreciation view on December 9 because Trump campaigned on pro-growth policies; in particular, significantly lowering the US company tax rate,” Mr Grace said.

That view – one shared by most in the market – proved premature, as the relatively young presidency of the former reality TV star disappointed those high hopes. Rather than push through legislation, Mr Trump has been busy, in turn, igniting and extinguishing various controversies that have distracted from pursuing his party’s agenda.

The Bloomberg US dollar index, which measures the greenback against a basket of currencies, had jumped by 4.3 per cent by the end of 2016 following the election, but has since dropped 10 per cent in 2017 to be 7 per cent lower than November.

Similarly, the Aussie dollar dropped around US4?? after the US election to end 2016 at around US72?? – a fall of 5.5 per cent – only to rally 10 per cent to close to US80?? now.

In May the CBA analysts reverted to their previous view of a weaker, rather than stronger, greenback, and have now lowered their forecasts “as the US dollar has fallen even more rapidly than we anticipated”.

The factors to weigh on the US dollar are the same, Mr Grace said. Specifically, while the US Fed is poised to lift rates again by the end of the year, the monetary tightening in other jurisdictions, such as Europe, will have a “greater appreciating impact on their exchange rates” this year and the next.

Also, “fiscal policy inaction by the Trump administration, particularly in the area of cuts to the US company tax rate, will continue to work against the US dollar”, Mr Grace said. World economy

But the Aussie’s strength will not be explained purely by the greenback’s weakness, as “a strengthening synchronised global economy is typically bullish for Aussie and the commodity currencies”, he said.

“The unexpected large improvement in the world economy has supported Australia’s commodity export prices for longer than expected,” Mr Grace said.

“Mining commodity prices are lifting despite increases in commodity supply. This means demand for commodities is increasing at a faster rate than commodity supply. We believe this is because G3 demand (that is, the US, the Eurozone and Japan) for commodities is just as important as Chinese demand.”

The other reason is that “a narrowing Australian current account deficit, and an improving Australian economy are currently having an even more supportive, and appreciating effect, on the dollar than we originally anticipated”.

These factors are working to offset the narrowing bond-yield spread between the US and Australia, a factor which would normally work against the local currency.

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