The Australian dollar will peak at $1.05 once the Reserve Bank raises interest rates later this year, predicts National Australia Bank senior currency strategist John Kyriakopoulos, but following this cyclical retreat he forecasts a long-term average which may surprise.

 

Kyriakopoulos believes the long-term average of the AUD will be US$0.90, about 30 per cent higher than the average of the local currency since its float, for at least the next 10-15 years as the China-driven mining boom plays out. The strategist was addressing a lunchtime crowd of super fund and funds management staffers in Sydney.

The greatest risk to this scenario was a Chinese ‘hard landing’, although he cited recent Chinese Government efforts to cool its economy as encouraging signs of its fiscal credentials. The continued diminution of the USD’s role as ‘the’ global reserve currency was also used by Kyriakopoulos to support his case, although he added the AUD would depreciate in future years against the Korean won and, eventually, a more freely-floated Chinese renmimbi.

With the AUD’s current position just above USD parity ‘testing everyone’s views” on the currency, NAB’s head of funds manager relations Donald Hellyer observed that managed fund operators and super funds were revisiting their hedging strategies, particularly in regards to having sufficient liquidity to fund currency forward contract rolls in a scenario of severe currency volatility.

NAB currency strategist Danica Hampton used the liquidity argument to address a question from the floor about why the bank favoured three-month terms on currency hedging contracts. She admitted that while a one-month roll produced a hedge more in line with underlying risks, the need for the hedger to keep coming up with cash each month was a challenge. A three-month roll reduced this challenge while also fulfilling its currency risk reduction purpose – Hampton pointed out that contracts longer than three months actually increased the volatility of the portfolios to which they were applied.

 

 

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