The Australian dollar certainly has been in fine form over the last few weeks. And if the economics team at Westpac Banking Corp (ASX: WBC) are to be believed, there could be more gains ahead for the local currency.
Which could be good news for companies like ARB Corporation Limited (ASX: ARB), Nick Scali Limited (ASX: NCK), and Reject Shop Ltd (ASX: TRS). This is because these companies pay for some of their goods in U.S. dollars, so a stronger local currency gives them more bang for their buck.
Why does Westpac think the Australian dollar can go higher?
Westpac’s chief economist, Bill Evans, notes that the Australian dollar has been on fire recently.
This strong gain has been driven largely by the solid performance of the iron ore price, which is up 25% from a level the bank previously felt was vulnerable to the downside.
However, given the supply disruption in Brazil and increasing demand in China, Westpac has changed its tune and appears confident that iron ore prices can stay higher for longer.
Mr Evans said: “We recognise that these positive influences on the iron ore price are unlikely to fade in the foreseeable future. Global opinion is highly sceptical about Brazil’s ability and commitment to bring the virus under control. China seems determined to make up for the “lost” first quarter, particularly in construction, over the course of the remainder of 2020 – and cram twelve months’ activity into nine.”
In light of this, the bank has lifted its year-end target for the Australian dollar by 4 U.S. cents to 72 U.S. cents.
What about in 2021?
Looking ahead, the chief economist expects a global growth recovery to boost demand for Australia’s key exports and support the Australian dollar.
“We are expecting global growth to lift from minus 3% (some forecasters such as OECD are now forecasting much deeper contractions of up to 6% in 2020) in 2020 to positive 5% in 2021, including a stunning 10% growth momentum in China,” Evans explained.
The bank expects this to take the Australian dollar up to 76 U.S. cents by the end of 2021.
Though, Mr Evans notes that there are downside risks to its forecasts, particular if the RBA were to take rates into negative territory.
The chief economist explained: “Downside outcomes for inflation and growth, exacerbated by an over-valued AUD, may well see the Bank reassessing its caution towards reducing the cash rate below zero.”
I think the Westpac economics team makes some great points and these forecasts could well prove accurate. This could make it a good time to look at shares that will benefit… and maybe start planning your next overseas holiday.
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Motley Fool contributor James Mickleboro owns shares of Westpac Banking. The Motley Fool Australia has recommended ARB Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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