Correctly predicting movements in the currency market is impossible to do, but most economists would agree that the Australian dollar remains significantly overvalued compared to its US counterpart.
The local currency has fallen dramatically over the last 12 months or so as a result of two interest rate cuts and ‘jawboning’ from the Reserve Bank, a climbing unemployment rate, poor business and consumer confidence and tumbling commodity prices.
However, the dollar has also been stubborn in that it refuses to fall below the RBA’s long-held target price of US75 cents. It currently resides at US76.93 cents – down from more than US81 cents last month – but without further easing in monetary policy from the RBA, it is unclear how the dollar will manage to fall below that level.
In what will come as good news for the local economy, Morgan Stanley has now weighed in on the argument, providing one of the most bearish forecasts for the dollar.
As highlighted by the Fairfax press, Morgan Stanley believes that soft economic data will finally force the RBA to cut interest rates even further, down to just 1.75 per cent before the end of 2015. That could see the dollar drop to US68 cents by the end of the year, before falling to just US62 cents by the end of 2016.
Fairfax also showed that those estimates are significantly below the consensus forecast of US74 cents for the end of 2015 and US76 cents for the end of 2016, according to Bloomberg.
A fall as significant as that predicted by Morgan Stanley would also be great news for shareholders of companies such as Westfield Corp Ltd (ASX: WFD) or ResMed Inc. (CHESS) (ASX: RMD), which generate most of their earnings overseas. As they repatriate their earnings back to Australia, the weaker Australian dollar helps to boost their global earnings.
Other companies such as Computershare Limited (ASX: CPU), Amcor Limited (ASX: AMC) and Macquarie Group Ltd (ASX: MQG) also stand to benefit as the Australian dollar falls, and investors should look to position their portfolios to take advantage of the opportunity.