Currencies | Jun 23 2010
By Rudi Filapek-Vandyck
The overnight action in FX markets does not bode well for the immediate outlook for the Australian dollar, suggest currency specialists at National Australia Bank on Wednesday morning.
They note AUD/USD has now fallen back below Friday's close of 0.8720, after having traded as high as 0.8833 on Tuesday as stocks worldwide ended their longest rally in 11 months.
This effectively means that all initial euphoria post the Chinese relaxing of the trading band of their currency against a basket of main trading currencies has already evaporated, less than 96 hours after the event (including Sunday).
China's Yuan (or renminbi) actually weakened a little on Tuesday after Monday's 0.43% rise against the USD, note the analysts. They note there is market speculation the Chinese central bank will intervene if traders try to push for a sharp appreciation of the Chinese currency.
While the PBOC did increase the value of the CNY in the fixing yesterday morning (USD/CNY down to 6.7980 from 6.8275) the currency actually closed lower (6.8130). This, say the analysts, cooled earlier investor euphoria about a strengthening Yuan.
NAB analysts note the market is at present pricing a 1.3% appreciation in the Yuan against the USD over the next six months. Other worries weighing on the Aussie dollar overnight included the health of European banks and the potential for a double dip in US housing activity. The UK government's emergency budget exceeded most expectations for addressing the large hole in public finances.
Savage cuts in public spending of around 25% over four years, a hike in the VAT rate to 20% from 17.5% and a GBP2bn levy on banks are expected to help cut the budget deficit to 2.1% of GDP in 2014 from the current 11%. This would reduce the chance that the UK loses its AAA credit rating, although, note NAB analysts, there is significant implementation risk and the substantial fiscal tightening will crimp economic growth.
They note AUD/GBP is down 1.5% from yesterday's high to 0.5885.
The team at NAB is cautious about the immediate outlook for AUD/USD. They are of the view the Australian dollar had once again run well ahead of commodity prices. The fall to now below Friday's close of 0.8720 is labeled “negative”.
NAB's short-term model's “fair value” estimate for AUD/USD is 0.8580 suggesting the currency is 1.6% “expensive” at the moment. The 20-day moving average at 0.8501 will likely be a key support level, argue the analysts.
Looking forward, NAB analysts believe investors will now shift focus to the US FOMC statement early tomorrow morning (4:15am, Sydney time). They believe there’s a good chance the statement will sound more cautious on the economic outlook, and if correct, this could weigh on investor risk-appetite, even though it would also reinforce that low US interest rates are here to stay for longer.
