Aussie, Kiwi to hold middle ground between wide extremes

The Australian dollar was seen holding its ground despite lower interest rates at home, though uncertainty over the global outlook led to a gulf in estimates for the high-beta currency. The median forecast of around 48 analysts put the Australian dollar at 98 cents on a one- and three-month horizon, followed by a gradual rise to parity in a year's time.
Yet forecasts ranged from as low as 90 cents to as high as $1.070 on a three-month view, and from $0.8000 to $1.1000 on a 12-month horizon. The Aussie was changing hands at $0.9860 on Tuesday, having been worth as much as $1.0857 and as little as $0.9581 so far this year.
The broad range of estimates reflects the commodity currency's sensitivity both to the growth outlook globally, and particularly China, and to risk sentiment in general. Cuts in domestic interest rates in May and June also caused volatility for the currency, though the fact Australia has room for stimulus is viewed by many as positive for the economy.
"Currency forecasting has never been more difficult than it is today," Huw McKay, senior international economist at Westpac. "Great discipline is required to keep one's forecasts on course as violent price adjustments have become more frequent."
Much will depend on major developments in the United States and Europe. Westpac expects further quantitative easing from the Federal Reserve but also extensive liquidity provisions from the European Central Bank, and it is not yet clear how these forces will balance out. "We will not be aloof to these trends," said McKay. "Current AUD weakness will persist deep into Q3, before a rebound late in the year that carries into the first half of 2013."
Adding to the mix is persistent demand for Aussie dollars from foreign central banks, in part to diversify away from US dollars.
Australia is one of the few countries left with liquid triple-A bonds for sovereign funds to hold. The authorities have also shown little inclination to intervene to restrain the currency, unlike Japan and Switzerland. Likewise, the New Zealand dollar is expected to hover around $0.7600 in the next few months, before edging up to $0.7800 on a 12-month horizon.
Again these was a wide divergence in estimates which ranged from as low as $0.6200 to as much as $0.8600. The kiwi currency was trading at $0.7678 on Tuesday, having ranged from $0.8471 to $0.7522 so far this year.