FYI | Aug 29 2007
By Chris Shaw
As a major currency in the global carry trade the Australian dollar was always going to be vulnerable to shifts in the market’s appetite for risk and so it proved a few weeks ago when sub-prime issues in the US expanded into a more serious and global liquidity crisis.
While the currency had clearly moved to an oversold level as a result of the market correction and in the last week or so has enjoyed something of a recovery in value against its major crosses, ANZ Banking Group senior currency strategist Tony Morriss points out to date the dollar has regained less than half of the ground it lost.
Morriss suggests there continue to be questions as to whether the recovery will continue in something like a “V” shape, as such an outcome would imply global growth expectations have not been affected by the recent market turmoil.
Much then will depend on future policy actions, Morriss pointing out a rate cut in the US next month would be an obvious supportive factor, though this in itself may not be enough to overcome tight market conditions resulting from the widening of credit spreads.
Other factors will also come into play, Morriss noting the next few weeks will see an update on hedge fund redemption levels for the September quarter as well as bank sector earnings in the US, both of which should provide greater insight into the market’s appetite for again taking on risk.
Over the medium-term there is also the issue of resetting adjustable mortgage rates in the US, with any resultant impact on household consumption levels to be watched closely.
Morriss’s view is there are enough uncertainties in play that the risk appetite of traders will continue to drive markets in the short-term, meaning fundamentals such as interest rate differentials that currently play in the favour of the Australian dollar will have less importance than they otherwise would.
Given this he suggests technical indicators may prove useful in determining market direction in the shorter-term and here he sees scope for the Aussie dollar to range trade between 80-84c against the US dollar.
The retracement target of US84.10c currently looms as significant resistance in his view, with a move above this level likely to require the support of more positive equity markets and continued confidence in the health of the global economy. If the Aussie dollar could breach this level it would open the way for a test of US88.70c, though such an outcome is unlikely in Morriss’s view given the prevailing uncertainty.
More likely is a consolidation, meaning support levels at US81.3c, US80c and long-term at US76.8c are a chance of being tested depending on the extent of any weakness in equity markets.
