The strength of the Australian dollar has taken investors by complete surprise so far this year, and it could soon force the Reserve Bank of Australia into action.
The local currency is currently fetching just over US75.5 cents, which marks a rise of roughly 3.7% since the beginning of the year. Even more shockingly, it has surged 10.6% since the currency hit a low of just US68.28 cents in mid-January, which was a price level that the country's central bank would have been far more comfortable with.
Indeed, members of the RBA have indicated that their preferred level for the Australian dollar is around US65 cents. At that level, our exports would become far more competitive with goods and services provided by other countries, and thus boost the growth of the non-mining sectors of Australia.
The problem is, a number of other countries are also eager to depreciate their own currencies for similar reasons. To do that, many have even cut their cash rates into negative territory, while the RBA itself has held firm on its current rate of 2%.
However, there is a growing chorus of analysts who believe it will not be able to maintain that stance for much longer, including Vimal Gor, head of fixed income for BT Investment Management. According to The Australian Financial Review, Gor believes the RBA will need to cut interest rates by half a percentage point, which would take the cash rate to just 1.5% potentially before the end of the year.
His short-term prediction is for the Australian dollar to rise as high as US80 cents, which would prompt a response from the RBA in the second half of the year. That could push the dollar back to around US71 cents, based on consensus estimates from some analysts, while BlackRock's Stephen Miller thinks it could fall well below that level, according to The Sydney Morning Herald.
A higher dollar now is good for net importers of goods, including a number of retailers. However, other companies which generate more of their earnings overseas, including Westfield Corp Ltd (ASX: WFD), ResMed Inc. (CHESS) (ASX: RMD) and Cochlear Limited (ASX: COH), will likely benefit in the long-run if the dollar does fall, as most analysts expect will happen.
Foolish takeaway
Betting on currency movements is not without its risks – particularly when it comes to forecasts being made for the near term. However, there are a number of reasons to believe that the dollar will fall in the medium-to-long run, especially if commodity prices do retreat again. And if the dollar doesn't start to fall on its own accord, we could certainly see the RBA intervene.
