FYI | Jul 11 2007
It was May 2004. Everybody was bearish the US dollar. I had come across this currency specialist who had left JP Morgan and was building up a team at ANZ.
He wrote he was convinced the US dollar was getting ready to surge. I read his report. Probably two or three times. And I became convinced he was right. The US dollar was to make a sudden come-back.
I was editor of another e-zine at the time. I decided the title of the edition would be: Watch out for the US dollar surge. A few weeks later our warning proved correct: the greenback bounced and took most investors by surprise.
About a year later I finally met Craig Ferguson in person. He was giving a presentation to staff of a hedge fund in Sydney and I was invited to attend as well.
I said: you know we made your call on the US dollar our cover story last year? How did it go, was his response. I said: it was spot on.
Towards the end of last year Craig called me. He said the local media and investment community are overlooking the fact that the Aussie dollar was likely to move beyond US$0.80 this year. I agreed we should have a chat.
By then Craig had left ANZ to start up his own hedge fund, Antipodean Capital. Again his forecast was contrarian to the general view in the market which in essence was that the Aussie would likely have a brief sniff at the US$0.80 mark but soon fall back to the mid-to-low US$70s again.
My Weekly Analysis in the closing week of November carried the title “Ready For The Annual US Dollar Decline?” I decided to include Craig’s view. Here’s what I wrote:
”Ferguson sees four major factors supporting his view that the Australian dollar could well trade as high as 0.90 against the greenback next year. Apart from the widening interest rate differential, he sees AUD support coming from relatively strong commodity prices, a gradual reduction in Australia’s traditionally high current account deficit and the fact that most super funds in Australia don’t have a currency hedge in place.”
The forecast looked a bit ridiculous at the time. Weren’t commodity prices supposed to trend down into the new year? And what about this “widening interest rate differential”?
The Aussie did break through the unbreakable US$0.80 barrier though. And this week it touched US$0.86. The general view is now that we won’t see the currency back below US$0.80 anytime soon.
Nobody is always right. The potential scenarios Craig presented to the hedge fund in Sydney did not materialise.
This week I decided to contact Craig again to find out about his latest views. After all, he must have been among the few who called the Aussie beyond US$0.80 nine months ago. (As it turned out he has held this view for over a year now, I only became aware of this in November last year).
My timing proved immaculate. Antipodean Capital had just updated its views.
As I suspected, Craig sees further upside to the currency still. The forecast for US$0.90 (by March 2008) is still in place. Only this time he believes the Aussie can possibly surge well beyond that figure.
Antipodean’s valuation model values the Aussie at or near parity with the greenback. So what is needed to actually make this happen?
Craig and his team are once again not in synch with the general view that the next move by the US Fed will be to raise interest rates further. He thinks the odds are slightly in favour of an interest rate cut instead. In Australia, however, the trend remains for further tightening. Combine this with ongoing commodity prices strength (he remains bullish on copper) and the result should be a further strengthening Aussie.
Apart from a “widening interest rate differential” (see November 2006 above) he also believes reserve diversification by central banks and large international institutions, slowing gains by US equities and even a potential share market correction should all contribute to further US dollar weakness.
If his view proves correct the greenback could devalue by another 8-10% by mid next year.
By then we will all have become used to the euro trading at US$1.47, the British Pound at US$2.20 and the Canadian dollar at beyond parity.
And the Aussie? Craig thinks US$0.95 looks achievable. If things turn out worse for the greenback we could be talking one Aussie for every George Washington.
This must be every local exporter’s worst nightmare.
Till next week!
Your I might consider booking my next holiday overseas editor,
Rudi Filapek-Vandyck
(As always supported by the Fab Three: Greg, Chris and Terry)