Currency analysts at Westpac expect the Australian dollar could reach 80 US cents in 2021, buoyed in part by a weak US dollar and strong iron ore demand.
It could put the Reserve Bank to the test if the recovery in the Australian economy proves weaker than expectations, and may force it to consider currency intervention or negative interest rates – two options it is has been reluctant to entertain.
Westpac says the Aussie – currently around 72 US cents – will reach 75 cents at the end of this year and 80 cents by the end of 2021. It puts fair value for the currency at 78 cents.
Westpac chief economist Bill Evans says the local currency enjoys the benefit of a higher interest rate over the US dollar, even at an Australian cash rate of just 0.25 per cent.
Iron ore, one of Australia’s major exports, has seen a strong rise in its price, while steel prices and production are up strongly in China.
China suffered a 10 per cent economic contraction during the March quarter, being the first country to be struck by the coronavirus pandemic.
“The Chinese are in a rush to try and make up for that loss and still end up with a fairly decent number for the year,” Mr Evans says.
Westpac expects China will expand by 15 per cent from a low point in March, which Mr Evans admits would be an extraordinary pace of growth.
Mr Evans expects the October 6 budget to be “very stimulatory”.
The Reserve Bank has indicated it is not interested in currency intervention and would only intervene if it thought the currency was a long way above where it saw fundamental levels.
But Mr Evans said if the economy performed significantly worse than the Reserve Bank was expecting, but the currency was still lifting, the central bank may decide it wants to support the economy through the currency.
“That might mean (currency) intervention or it might even mean negative interest rates,” Mr Evans said.