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Australian dollar forecasts raised

Australian dollar forecasts raised

Year-end Australian dollar forecasts against the US dollar are up from US70 cents to US78 cents, after Commonwealth Bank (CBA) currency analysts brought forward the long-held view of a cyclical recovery in the AUD/USD exchange rate.

Four reasons behind the revision:

1. Australia's economy continues to surprise

Unemployment is down to 5.8% since peaking at 6.3% in July 2015 and the Reserve Bank of Australia (RBA) is forecasting a further decline.

"We anticipate Australia's economy to further accelerate in 2016 and 2017, with Australia's unemployment rate to further decline," CBA chief currency strategist and head of international economics Richard Grace said in a note.

2. Global commodity prices could be bottoming

Iron ore, Australia's biggest export commodity, is up 50% in price since mid-December. This is likely to boost Australia's terms of trade for the current March quarter.

"Australia's terms of trade remains one of the best long-run guides to the AUD," said Grace, so this would suggest good support for a stronger local currency.

3. US Federal Reserve to 'proceed with caution'

Since the US Federal Reserve lifted rates in December for the first time in a decade, there has been much speculation about how quickly the central bank might proceed with increases throughout 2016.

At first, four rate rises were expected, then two, and on Wednesday, US Fed chair Janet Yellen said the Fed plans only a gradual pace of interest rate increases in light of global pressures that could affect the US economy.

She didn't specify a timetable for further interest rate rises, but said that because foreign economic growth seems to have further weakened in 2016, the Fed will "proceed cautiously" in raising rates.

"We now believe the Fed will deliver only two further interest rate rises this year," said Grace.

4. Current account deficit set to improve

The current account is the difference between Australia’s savings and its investment. A current account deficit occurs when the value of goods and services a country imports exceeds the value of goods and services it exports.

Grace said Australia's current account deficit is set to improve over 2016 and 2017, benefiting from an increase in the volume of liquefied natural gas (LNG) exports and low debt servicing requirements as interest rates remain historically low.

AUD/USD forecasts from Commonwealth Bank

The bank expects the New Zealand dollar to end the year at US71 cents, compared with its previous forecast of US65 cents.

USD is expected to buy 108 Japanese yen by the end of the 2016, compared with a previously forecast 112 yen.

Exchange rate forecasts for the euro have been raised.

"We now foresee EUR/USD rising to 1.160 by end-2016 and 1.200 by mid-2017."

Near-term (British pound) GBP/USD forecasts have been revised down to US$1.38 in June and US$1.44 in September "given the political uncertainty generated by the UK's upcoming referendum on its European Union (EU) membership scheduled for June 23 is generating a heavy weight on the GBP exchange rate". However, the bank held its year-end forecast at US$1.51.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice.