FYI | Mar 12 2009
By Chris Shaw
One market trend to emerge over the past few trading sessions has been a greater investor risk appetite and while this has obvious positive implications for equity markets, it also has implications for currency markets.
As Standard Chartered points out, the financial crisis has seen the US dollar remain heavily in favour, as with investors everywhere attempting to de-leverage their positions and repatriate money to their home country, the greenback has been a beneficiary due to its role as the global reserve currency.
This situation is unlikely to change anytime soon and so over the medium-term the US dollar should remain well supported. At the same time, however, there is a huge amount of money waiting on the sidelines to be invested and so any trigger could, in the bank’s view, see some short-term pressure placed on the US currency. This is especially the case given current market positioning is long the US dollar against both developed and emerging currencies.
Possible triggers for such a change in trend shorter-term in the bank’s view include any move by US authorities to adopt additional quantitative easing measures as authorities attempt to counter the global economic downturn. This also includes the scope for mark-to-market accounting to be suspended for a period to allow for banks to repair their balance sheets.
Such moves would likely see the US dollar lose favour for a while and leaves the bank suggesting there are good reasons, both fundamental and technical, to assume the greenback could see some pressure in coming weeks. As TD Securities points out, such a change in trend also has implications for the dollar bloc currencies as well.
The broker notes the US dollar/Canadian dollar pair has shown one of the strongest correlations to US equities of late, so if global risk appetite improves so should the Canadian dollar. As well, the broker notes, commodity prices have also improved a little of late, though this has yet to flow through into much additional support for the Canadian currency.
Rather than being likely to break out of its current range, the broker suggests the Canadian dollar is simply at the lower end of its current range against its US counterpart at around the 1.30 level and should enjoy some modest strength over the remainder of the year.
Recent sessions have seen the Australian dollar range trade against the greenback between US63c and US65c, though at the same time the Aussie has gained on some other crosses despite some relatively weak economic news such as the disappointing 4Q GDP outcome.
TD Securities global strategist, Stephen Koukoulas, remains an Aussie dollar bear and so would use any periods of strength to sell the currency against the US dollar given the likelihood of the Reserve Bank of Australia (RBA) being forced into further interest rate cuts beginning next month.
Koukoulas notes the Aussie dollar is around 10c below its long run fair value level at present but with the Australian recession unfolding and commodity prices falling heavily, the news will get worse and this should put the currency under additional pressure.
Similarly, Koukoulas suggests selling the New Zealand dollar against the US dollar as in his view there are a number of bearish issues confronting the Kiwi currency at present. Interest rates are likely to fall below the level of rates in Australia in coming months, this at the same time as the current account deficit should widen and the budget deficit will increase.
This is before weaker commodity prices have fully flowed through in terms of the impact on the economy, so in Koukoulas’s view it is still one-way traffic as far as the direction of the NZ Dollar against the greenback is concerned.
In terms of forecasts, TD Securities expects the Aussie dollar to average US61c against the greenback in the March quarter and US58c in the June quarter, while for the same periods it sees the NZ Dollar averaging US49c and US45c respectively.
