FYI | Jul 16 2008
By Chris Shaw
Market consensus is the Reserve Bank of Australia (RBA) won’t be making any move on interest rates at its upcoming meeting early next month, but even taking this into account the trend for the Aussie dollar against the US dollar remains up according to ANZ Banking Group senior currency strategist Tony Morriss.
Supporting Morriss’s view is the fact the US financial system remains under pressure, this despite extensive measures introduced by the US Federal Reserve designed to provide some support as US banks in particular deal with the global credit crisis.
The weakness in the US economy leads Morriss to suggest there is little scope for the Fed to lift rates in coming months given the weakness in not only the banks but the housing sector as well and as this realisation dawns on traders in forex markets the US dollar has drifted lower and is likely to continue doing so.
While weakness in the greenback offers support for the Aussie dollar so too does strength in commodity prices, which are rising in US dollar terms as that currency loses value. This is also pushing up the euro relative to the US dollar and Morriss suggests a move above 1.60 in this currency pair would support a further leg up for the Aussie dollar as well.
The Australian dollar also enjoys yield support against not only the US dollar but a number of other currencies given the positive differential between interest rates in Australia and the US and other markets, a trend unlikely to change in coming months given the inflationary pressures evident in the Aussie economy.
Another trend of interest in Morriss’s view of late has been the lack of any real fallout for the Aussie dollar as investors globally become more risk averse. Around the middle of last year when the credit crisis was first emerging the Australian dollar quickly fell relative to the yen as traders unwound carry trade positions but as the crisis has continued this year the attention of the market now appears to be on the weakness in the US dollar rather than any vulnerability in the Aussie at current levels.
As well, Morriss points out the next round of CPI data for the Australian economy is due for release next week and traditionally in the lead-up to such releases the Aussie dollar gains ground, so there appears to be additional short-term upside on offer especially as investments flows remain supportive at present.
Currently the Australian dollar is in a trading channel against the US at around 0.9750 but in Morriss’s view any move through this channel would see 0.99 become the next target. While that would suggest a move to parity and beyond is possible Morriss takes the view such a level would prove to be short-lived as it would further tighten conditions for exporters outside of the resources sector.
In the medium-term Morriss is also anticipating something of a recovery in the US dollar as eventually there will be some signs of stability in the US financial system, with such an outcome likely to put downward pressure on commodity prices and therefore the Australian dollar as well.
Factoring this into his forecasts Morriss anticipates the Australian dollar hitting 1.01 against the US dollar in the September quarter and 1.04 by year’s end before weakening in 2009 back to parity by the end of the March quarter and to 0.94 by the end of June.
