The growing demand for commodities could help propel the Australian dollar to as high as US$1.70, according to a United Kingdom-based hedge fund chief economist.
While many market commentators believed the Australian dollar was overpriced at US$1.10, Toscafund’s Savvas Savouri said the unit would rally to US$1.30 by 2013 and hit US$1.70 in 2014.
“I’m surprised the Australian dollar is so weak at the moment given the outlook for the Australian economy and the problems being experienced in other countries,” Savouri said at the EuroFinance conference in Sydney.
The federal government’s budget predicted above-trend real gross domestic product (GDP) growth over the next several years due to factors including a strong forecast increase in commodity exports and record mining investment along with a return to surplus by 2012/13.
The Australian economy is forecast to expand at 2.25 per cent in fiscal 2011, followed by 4 per cent growth in 2011/12 and a 3.75 per cent rise in 2012/13.
This compared to projections of below potential economic growth, high unemployment and big fiscal deficits over many years for most other advanced economies, including the United States and eurozone, according to the International Monetary Fund.
“A rising Australian dollar is an endorsement of your economy and is not something to be feared,” Savouri said.
“The demand for the Australian dollar will continue in tandem with resources as long as economies such as China and India are booming.”
RBC Capital Markets fixed income strategist Michael Turner said a stronger Australian dollar would be damaging to a lot of sectors in the economy, especially manufacturing and tourism and to a smaller extent retail.
But Turner disagreed with Savouri’s forecast of US$1.70 for the Australian dollar.
“It’s a fairly extreme view. To get to US$1.70 you would need a lot of factors to really line up in your favour,” he said.
“As well as ongoing commodity demand you would need persistent US dollar weakness, which is not our base at RBC.”
RBC expected the Australian dollar to decline to parity by late 2011 and then drop to 94 cents by the end of 2012.
“If the Australian dollar hasn’t seen its peak already, we don’t think it would go too much higher from current levels,” he said.
Naos Asset Management managing director Sebastian Evans said it would be difficult for the Australian dollar to go to US$1.70 if the US economic recovery continued.
“Additionally, if there is any hint that the Federal Reserve wants to raise interest rates, you will see the US dollar form a base and there will potentially be a rush to buying US assets, which might drive the greenback higher,” Evans said.
Banking group HSBC warned the Australian dollar was 37 per cent overvalued against the greenback.
The currency faced growing risks, including a slowdown in China, decreasing merger and acquisition inflows and an unwinding of speculative Australian dollar positions held by investors, the bank said in its May currency outlook.
