The Australian dollar is once again trading near US91c after Westpac Banking Corp's (ASX: WBC) chief economist, Bill Evans, changed his forecast on interest rates for the remainder of 2014.
While he previously forecast a further two rate cuts this year to take the nation's official cash rate down to just 2%, he now believes the current rate of 2.5% will be upheld for the remainder of the year before being increased in the third quarter of 2015. He also changed his 12-month target for the Aussie dollar from US85c to US87c which saw the dollar rally as high as US90.99c on Tuesday. Given that Evans was the only economist to predict the beginning of the Reserve Bank's easing cycle back in 2011, traders closely follow his predictions.
His forecasts come as bad news for companies which generate much of their revenue from international markets, including blue-chip stocks ResMed Inc. (ASX: RMD) and QBE Insurance Group Ltd (ASX: QBE), as well as our miners which are already under pressure with falling commodity prices. On the other hand, a stronger Aussie dollar is good for travel companies such as Flight Centre Travel Group Ltd (ASX: FLT) and retailers including JB Hi-Fi Limited (ASX: JBH) or Harvey Norman Holdings Limited (ASX: HVN), given that they have to import most of their products.
While Evans has changed his views, National Australia Bank Ltd (ASX: NAB) and Bank of America Merrill Lynch economists still have their money on another rate cut in the second half of this year. That would push the dollar downwards to a level that the RBA would be more comfortable with.
Foolish takeaway
Although it is almost impossible to determine whether a currency is over – or undervalued at any point in time, the dollar is still trading above the long-term average of around US85c. As such, it is likely that we will see the dollar fall below its current level in the coming months as the US economy continues to strengthen.
