Aug 22

The Australian Dollar: Where to next?

Dr Shane Oliver (Head of Investment Strategy and Chief Economist, AMP Capital)
Following its dramatic change of fortune in 2013, the Australian dollar has hovered in the US$0.87-0.95 range since the beginning of 2014, but where is it heading from here?

Broadly speaking, the Australian dollar is seen as overvalued and is expected to depreciate.However, the timing of this is uncertain. In the near term, supporting a higher A$ are near zero interest rates and easy monetary conditions in the US, Europe and Japan. These measures make it more attractive to park money in Australia because it has higher interest rates.

On the other hand, signals that the Australian dollar may fall at some point include weakercommodity prices and an increasing likelihood that the Bank of England and the US Federal Reserve will start to increase interest rates before the Reserve Bank of Australia. In addition, the Australian dollar is considered overvalued (allowing for relatively high Australian costs and prices) and this is slowing the rebalance of the economy away from a reliance on mining investment.

Given that the Australian dollar has already corrected some its significant overvaluation compared to commodity prices and interest rate differentials, we expect the eventual resumption of its depreciation to unfold over a run of years rather than via a sharp short term fall.