By Levi J Parsons
SYDNEY, Oct. 10 (Xinhua) -- With the United States widely expected to raise interest rates before the end of the year and the growing optimism surrounding the possibility of U.S. President Donald Trump administration's implementation of generous tax reform policy, many Australian economists are predicting the local currency will take a sharp dive against the greenback in the coming months.
However, Australia's largest financial institution, the Commonwealth Bank of Australia (CBA) sees things differently.
"We are taking the opposite view," CBA's senior currency strategist Elias Haddad told Xinhua on Tuesday.
"We actually believe the Australian dollar will rally toward 85 U.S. cents over the next 12 months."
While the U.S. dollar is anticipated to strengthen on the back of the Federal Reserve's potential December rate hike, Haddad explained that money markets have already priced in the increase.
"I think it's about 80 percent is priced in... so certainly in the short term higher interest rates will offer some support for the U.S. dollar, but it's unlikely going to be a material long term driver for the Australian dollar," he said.
During the month of July 2017, the Aussie dollar shot up 4.1 percent to reach a two year high, trading above 80 U.S. cents.
Since then however, a strengthening greenback and rising fears about Australia's surging household debt problem and low wage growth, have seen the local unit drop well below 78 U.S. cents and interest rates continue to hold at a record low of 1.5 percent.
"The Reserve Bank of Australia (RBA) has time to leave interest rates where it currently is right now," Haddad said.
"Australia's economy is doing fairly well and domestic demand is holding up fairly well, employment conditions are encouraging, so there is certainly scope at least in the near term for Australian rate expectations to adjust a little bit higher."
The continuing improvement of Australia's current account balance, now narrowing toward 2 percent of GDP, could also be a major factor that helps raise the fundamental value of the Aussie dollar.
"We expect the RBA to begin lifting interest rates in November (next year) when the economy starts to improve and inflation pressures accelerate," Haddad said.
"As for the household debt issue, the RBA will let macro credential measures deal with this rather than trying to curtail the issue with monetary policy."
At the moment according to Haddad, broad based global growth is quickly gaining traction and Australia's largest trading partner China is continuing to develop rapidly.
For Australia's resource based economy, this trend will "continue to underpin commodity prices and will support Australia's terms of trade, which is also a supporting factor of the Australian dollar," Haddad said.
From a fundamental perspective, this should mean that the Aussie dollar will not be overvalued at 85 U.S. cents and rise in line with an improving Australian economic backdrop.
But a key risks that may change the CBA's bullish forecast is weather the Trump administration is able to introduce a tax reform package that aims to boost growth in the U.S.
"If we do indeed have those big and massive corporate tax cuts it will lead to an upward revision to U.S. interest rate expectations," Haddad said.
"It will also lead to an increase in foreign capital flows to the United States which would lead to broad based U.S. dollar strength."
"The legislative process, however, is still in its infancy at this stage, so we will have to wait for the negotiations between the various members of Congress and the administration officials to get a better idea."