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How has the economic situation in Australia and New Zealand changed compared to last year? Do you share a positive outlook for Australia's and New Zealand's economy for this year?
I guess there is a bit more uncertainty surrounding the Australian economic outlook now. The money investment boom has probably peaked and we are a little bit unsure about how much support the RBA rate cuts have provided to the other parts of domestic economy. The question is still whether or not the RBA has done enough to stimulate domestic demand as mining side of the economy somewhat cools. Thus, there is probably a little bit more uncertainty affecting Australia's economic outlook.
Meanwhile, New Zealand is facing a slightly better situation, because we think that rebuild from the earthquakes is possibly going to really benefit economic growth this year. So even though we had earthquakes already quite some time ago, the rebuild activity is going to boost residential construction only now.
Hence, we have 3.2% growth forecast in New Zealand and that compares with 2.3% last year. In Australia we have got 2.7% this year compares with 3.5% last year, since mining sector will provide less stimulus to the growth outlook. Both economies are going to grow at a reasonable pace, likely to be better than in the Euro area, Japan etc. However, from a relative perspective New Zealand is likely to outperform Australia.
How have the recent developments in Japan influenced the performance of the Australian and New Zealand Dollars?
We have seen changes in the Japanese government late last year. That is something that the market is obviously paying very close attention to, because this new government wants a much more aggressive and dovish Bank of Japan in terms of what they do about their inflation target, and their balance sheet expansion etc. Thus, I guess it quickly becomes apparent that there is a real risk that the Bank of Japan really runs up the balance sheet this year at a time when the U.S. Federal Reserve, at least, in the second half of this year towards the end of 2013 might be looking to scale back or slow down balance sheet expansion.
Long positions in typical carry currencies like the Australian Dollar and New Zealand Dollar may start becoming more funded in currencies like the Yen rather than the U.S. Dollar, which is a reverse of what we have seen over the past 2-3 years. That could be quite a powerful development where we see the Yen weakening quite a bit against the Australian and New Zealand Dollars.
What is your outlook for AUD/USD and AUD/JPY for the end of January and for the end of the quarter?
I guess by the end of January we would see AUD/USD at 1.05, while in AUD/JPY we could potentially see a little bit of upside momentum. I would say probably 95 would be my target for AUD/JPY by the end of January. For the end of the quarter we have got 1.06 for AUD/USD. In terms of the Yen we probably expect to see a bit more Yen strength between now and the end of this quarter, thus our forecast for AUD/JPY is around the 90 area.
It is a quite a similar story with the New Zealand Dollar against the Yen - slightly more upside risks for the New Zealand. I expect NZD/JPY at 77 by the end of January, and then back to 75 by the end of this quarter. Our forecast for NZD/USD for the end of January is 85, and then the pair is likely to touch 86 by the end of the quarter.