The Australian dollar is expected to oscillate around 80 US cents over the second half of calendar 2009, but could move higher if China’s appetite for Australian resource commodities ramps up.
The domestic currency has gained about 11.3 US cents since the end of 2008, having traded higher on a more resilient performance in the local economy despite the severity of the global economic crisis.
The unit was on Friday June 26 tracking around 80.45 US cents, up from 69.22 US cents at December 31 2008.
It’s expected to end 2009 well in front on an annual basis at around 78 US cents, according to the median of seven analyst forecasts gathered by AAP.
That outlook compares to a similar survey in late 2008, which had predicted the unit to be around 69 US cents by the end of this year.
However, the latest range of forecasts is wide – from 71 US cents to 85.5 US cents – indicating a range of risks ahead for the currency’s performance, including the outlook for a global and domestic economic recovery.
While the Australian dollar has tracked higher through the first half of calender 2009 on improved global risk appetite, analysts say a key factor ahead will be China, and its prospects for growth.
Since March, China – Australia’s second largest trading partner – has been buying up crude oil, copper, coal and other raw materials, helping to push the Standard & Poor’s GSCI, a key index of global commodity prices, up 26.5 per cent.
The Australian dollar, which is considered a commodity price sensitive currency, typically trades in line with demand for goods including iron ore, oil and coal.
The most bullish strategist in the AAP survey, Custom House Global Foreign Exchange corporate risk manager Charles Wiggins, predicts the local unit to reach 85.5 US cents by December.
Mr Wiggins said increasing demand for commodities from China will see the unit trend higher over the first half of the 2009/10 financial year.
“Our major exports are iron ore and coal, which are major consumerables by the Chinese,” he said.
“And it’s one of those industries where you look at your base industries, like copper, it’s one of those that’s used quite a bit for tools and equipment (in China).
“If commodities start to drift off because demand isn’t there from China then you get in a situation where the Australian dollar has to suffer as a consequence.”
This week, the Organisation for Economic Cooperation and Development (OECD) forecast China’s economy to expand by 7.75 in calendar 2009, which was an improvement from its March forecast for growth of 6.3 per cent.
It said China’s low level of public debt and ample cash holdings, combined with room for further fiscal expansion would also boost activity into 2010, speeding its recovery from the global economic downturn.
“The type of recovery we’re looking at in China, whilst it might not have great benefits for many other Asian economies, does have benefit for a commodity producer like Australia,” Nomura Australia chief economist Stephen Roberts said.
“Mostly because raw materials are going to go into a lot of China’s capital spending works.”
“China looks like having a `V’ shaped economic recovery.
“That will be positive longer term for Australia, so that’s one of the key factors supporting the Australian dollar.”
As well, Mr Roberts said, improving global equity markets will support investor optimism and risk appetite for Australian dollars.
In recent weeks, the US main stock index, the Dow Jones Industrial Average has been on an upward trend due to hopes that the economic recession in the world’s biggest economy is abating.
That optimism has carried through to the Australian stock market, with the broad All Ordinaries Index up about 26 per cent at June 26 from a calendar year low of 3090.8 in March.
However, ANZ economist Katie Dean said that positive sentiment was fragile and could easily be eroded, creating some downside for the Australian dollar.
“Prospects for the global economic recovery have been priced a little bit too aggressively in currency markets at the moment,” she said.
“If we see a little bit more of a correction to a more gradual economic recovery then that will weigh a little bit on a the Aussie dollar which is a pro-growth, pro-cyclical currency.
“We expect the US dollar to find support over the second half of this year and that will weigh on the US Aussie cross.
Ms Dean sees the local unit at 73 US cents in December.
“It’s a very fluid forecast,” she added.
“If the Australian economy re-accelerates over the second half of this year, we see a strong rebound here, then that would see the Aussie gain favour.”