Improving global growth and synchronised interest rate hikes could drive the Australian dollar as high as 90 US cents next year, an economist says.
After a lacklustre 2017 for the local currency, a looming shift in global monetary policy is likely to support gains for the Aussie dollar, HSBC chief economist Australia and New Zealand Paul Bloxham said.
‘Looking into 2018, we see the Australia dollar climbing, as we expect it to get support from a lift in global growth, which is expected to support commodity prices, and we expect the RBA to lift the cash rate in 2018,’ Mr Bloxham said.
Low financial market volatility has meant the Australian dollar has traded within a narrow nine cent range in 2017, beginning the year at 72 US cents and hitting 81 US cents in September on heightened market expectations of an RBA interest rate rise.
The currency has since fallen back against a rejuvenated greenback, trading at around 75.5 US cents.
Mr Bloxham said currencies tend to lift ahead of rate hikes, and predicts a similar force to be at work in 2018.
‘We expect the Australian dollar to head towards 90 US cents,’ Mr Bloxham said.
What the RBA does is less important, initially, than what the market expects will happen to interest rates, AxiTrader chief market strategist Greg McKenna said.
Currency markets will anticipate and price in higher rates should global and Australian economic conditions continue to improve, he said.
‘If the economy evolves the way the RBA says, and the global backdrop suggests, this could lead to a material repricing of interest rate expectations,’ Mr McKenna said.
Many central banks have been flagging rate rises as economies recover from the global financial crisis, and expectations are for the RBA to join the trend in the second half of 2018.
The Australian dollar’s recent weakness is also related to yields on US and Australian two-year bonds, which has seen the local currency losing its appeal to traders.
US yields are now above the yields for Australian two-year bonds – something that has not happened for 17 years – as the US Federal Reserve is expected to lift rates later this month.
Mr McKenna said an easing of the market’s focus on those yields should help the Aussie dollar find support over the next 12 months in a trading range similar to 2017.
‘If all the positives come together the Aussie can extend that range with a run to 85 cents in 2018,’ Mr McKenna said.