Currencies | Mar 27 2009
By Andrew Nelson
What has been a pretty tight correlation between the Baltic Dry Freight Index and the AUD looks to have broken down over the past few weeks with the renewed strength in the Aussie. As we noted yesterday in our article (A Faltering Greenback And Resurgent Aussie), much of the recent strength of the Aussie has little to do with normal fundamentals and more to due with a faltering greenback.
While the currency was out of favour for most of the last seven months, TD Securities Global Strategist Stephen Koukoulas notes that over the last few weeks, everybody seems to love Aussie. At the same time, the Baltic Freight Index has dropped for 12 straight days.
Koukoulas notes this situation pretty much mirrors the jump in late December/early January that saw AUD jump to US$0.72. Back then, the Baltic Freight index struggled as well. Maybe time to remember that within just a few weeks, the Aussie fell right back down to US$0.63?
As of this morning, the AUD had just peeked above US$0.70 again. At the same time, Koukoulas notes the freight index is still falling steadily, to what are now exceedingly low levels. This is, of course, due to what are some dismal international trade flows, a continuation of weak commodity prices despite some recent stiffness and, of course, the generally gloomy economic news flow right around the world.
Given all of these factors, Koukoulas thinks conditions for any sort of lift in trade, freight movements and therefore commodity prices just aren’t there. And these are the factors that traditionally support the AUD.
So while he agrees the AUD may well continue to hold against an increasingly troubled USD, the risks for the AUD are still there. That means an unwinding of its outperformance against currencies the likes of the CAD, GBP, EUR and even the JPY are a distinct and very possible risk.
And it’s not just the freight rate that has Koukoulas sceptical about the recent signs of life in the Aussie. Let’s not forget that the Australian economy is inarguably in recession, with interest rates almost certainly to be cut further, while the global growth/commodity price story is neutral, at best.
