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WESTPAC: The Australian Dollar Will Rally Into Year's End

The Aussie dollar is under 87 cents this morning and not far above the low for the year of 0.8660.

But that’s not stopping Westpac chief economist Bill Evans and head of market strategy Rob Rennie anticipating a rally back to 90 cents over the rest of 2014.

Evans and his economics team was one of the few forecasters who weren’t encouraged enough by the Aussie’s pre-September strength to ‘upgrade’ their year-end Aussie dollar forecasts. Rather, they steadfastly stuck to their 90 cent call for the end of the year.

Over the six months to early September the AUD had remained firmly in the well worn 92.5¢ to 94.5¢ range. We were constantly required to justify our call for a target 90¢ by the end of the year, with the clear implication being that the call was overly pessimistic. The AUD has now clearly undershot our year end forecast. However we are not “chasing down” the AUD. We are retaining our year end call of 90¢.

The factors that we felt would drive the expected fall in the AUD – rising volatility; euro weakness defining a strong US dollar trend; and the lagged response to falling iron ore prices have all materialised with gusto.

But the Aussie dollar rally is not the only big call Evans is making.

He’s also calling the bottom in iron ore, saying that he is expecting a 15% rise into year’s end driven by “a reduction in the growth in supply of iron ore as we anticipate that local Chinese producers, who are already operating at costs 10–20% above the current market price, will not re-open a number of facilities after the Golden Week holiday”.

Two big calls for the price of one.

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