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Aussie Dollar Expected To Consolidate

FYI | Mar 04 2008

By Chris Shaw

In financial markets round numbers such as US$100 per barrel for oil or US$1,000 per ounce for gold are often important price points as it is around these levels traders place stops on existing orders, meaning a break through such levels can trigger further price moves.

ANZ Bank senior currency strategist Tony Morriss suggests the US dollar’s recent break through 1.50 against the euro is another example but while he sees it as setting the scene for a new round of weakness in the greenback he doesn’t expect it will be enough to drive the Australian dollar to parity against the US currency.

Rather he suggests the Aussie dollar has entered a new period of consolidation having lost some momentum after breaking through US94c recently, so it would take significant further weakness in the US dollar, and this implies a move to around 1.60 against the euro, for the Australian dollar to hit level terms with its US counterpart.

This is despite the trend for the US dollar remaining in favour of further weakness for at least several more months, Morris pointing out it would take either the end of US rate cuts or the beginning of cuts by the European Central Bank (ECB) to bring the greenback weakness to an end and the earliest this appears possible is the middle of the year.

CIBC World Markets agrees and though the US dollar has moved through its short-term targets the Canadian group has added scope for additional weakness in the currency in coming months. It now sees the US dollar as moving to 1.55 against the euro in the current quarter, noting such a move has potential given there remains room for additional speculative long euro positions in forex markets currently. This level should mark a peak for the euro and the group sees the US dollar recovering to around 1.47 by the end of June and 1.40 by year’s end.

It too doesn’t see the Australian dollar doing too much more against the USD and is forecasting a level of 96c by the end of March, before an easing to 95c by June 30 and to 90c by December 31, the June and December forecasts being broadly in line with those of ANZ Bank.

In terms of other cross rates ANZ’s Morriss suggests a recent break through range highs suggests further gains for the Aussie dollar against the Kiwi currency, with 1.1730 a key level as a break above this level would indicate a move to test previous high’s of 1.20 in his view.

Further gains against the yen may prove more difficult as while the interest rate differential remains in the Aussie’s favour the inability to break through the 100 yen level and the fact the upcoming expected rate hike is now factored into market forecasts means a retracement of recent gains is possible and this implies a move towards support at 94.10 yen.

With risk aversion again a factor for investors Moriss suggests some consolidation in the Aussie against the euro is likely, with 0.6070 seen as critical support as a failure to hold this level would see 0.5940 as the next target.

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