Currencies | Jun 22 2009
By Chris Shaw
The Australian dollar has performed relatively well in recent weeks against its US counterpart, National Australia Bank noting it finished last week above US80c on the back of improved investor risk appetite and a paring of recent expectations the US Federal Reserve would lift interest rates before the end of the year.
The bank points out this week’s FOMC statement should provide some additional insight into what lies ahead for the US dollar. If there are comments designed to further suppress expectations of a rate hike, the greenback could weaken further. However, if some timetable for the ending of quantitative easing is given or implied, the currency could rally, says NAB.
Regardless of the direction of the US dollar, the bank sees the Australian dollar as relatively expensive against it at present given on its analysis the currency is at the top of its fair value range. This means the short-term risk is to the downside unless fundamentals, such as industrial metals prices, continue to improve.
Longer-term NAB sees the currency strengthening on the back of an improved growth outlook in both China and globally, making a level of US80-85c reasonable by year’s end.
TD Securities agrees the Aussie is over-valued at present, pointing out while the currency has moved higher on the back of improving commodity prices the extent of the gain is difficult to justify given the bulk of the move in metals prices has come from a weaker US dollar and not a strengthening in underlying demand.
As evidence of this TD Securities notes in Aussie dollar terms the CRB index of commodity prices remains only just above 10-year lows and is around 10% below the 20-year average. At the same time, the Aussie dollar is 10% above its long-run average, suggesting recent gains in the currency are not sustainable.
What could bring about some weakness in the Australian dollar in the group’s view is some signs the Reserve Bank of Australia is ramping up its selling of the currency, this at the same time as it is believed to be preparing to cut interest rates further rather than hike them by year’s end as has been the market’s recent speculation.
Given this outlook, TD Securities suggests selling the Australian dollar against either or both of the British pound and Canadian dollar, the potential trades being to sell the currency against the former at around 2.04 with a target of 2.10 and a stop at 2.01 and against the latter at 0.9090 with a target of 0.86 and a stop of 0.9250.
