FYI | May 20 2008
By Chris Shaw
Ongoing weakness in the US dollar has proven to be a positive for those long the Australian dollar against the greenback and according to ANZ Banking Group senior currency strategist Tony Morriss this may continue, especially as there are enough other factors to suggest further gains in the Aussie currency in the weeks ahead.
For starters there is the recent strength in oil and gold prices, Morriss pointing out the improvement in commodity prices will provide a substantial boost to Australia’s terms of trade for a sustained period of time. Also supportive is the fact the Baltic Dry Shipping Index is again at record highs, which indicates a shortage of global bulk shipping and means the supply constraints for commodities globally are not yet being addressed, which is supportive for prices across the sector.
As commodity prices have strengthened there has been increased takeover and merger activity among Australian resource stocks and Morriss notes these moves offer scope for increased direct investment flows into Australia, which again are supportive for the Australian dollar.
At the same time volatility on global markets is declining, according to the S&P500 VIX Index, and as this occurs Morriss suggests it is fair to argue the popular carry-trade crosses such as the Australian and New Zealand dollars should be trading at higher levels to reflect this. Supportive here are relative yields, which imply a positive cost of carry for investing in the Australian dollar against all other major currencies at present except the New Zealand dollar.
As well, with credit availability improving there is less pressure for Australia to fund the current account deficit and this should make the Australian currency less vulnerable to negative sentiment in his view. Speculators are long the dollar but as Morriss points out, the amount of long positions has reduced in recent sessions so this is unlikely to be a negative, while from a technical point of view evidence of any break above 0.615 against the euro and 100.50 against the yen would suggest the beginning of a new leg higher for the Aussie generally.
On the other side of the ledger the key risk in Morriss’s view is for the US dollar to extend its recent corrective phase, but even if this were to occur he argues the Aussie can still outperform against other crosses even if it were to weaken against the greenback.
A further risk is continued weaker economic data leads to increased market speculation the Reserve Bank of Australia’s next move on rates will be down, though as Morriss notes if upcoming data offers signs sentiment is recovering the market may quickly move to an expectation of a further hike in rates and this too would be supportive for the currency.
Factoring all this in leads Morriss to suggest a break above US96.5c remains possible and any move through this resistance level is likely to signal a move to test parity against the US dollar. On the downside strong support for the Aussie dollar exists at US92.5-93.5c at present.
Longer-term Morriss is forecasting an Aussie dollar/US dollar rate of 92c by the end of September and US90c by the end of the year, before a further decline to US87c by the end of the March quarter next year.
With respect to the Aussie against the Kiwi dollar Morriss notes while it remains the only currency against which there is not a positive cost of carry the outlook remains for further gains, as expectations are the Reserve Bank of New Zealand is forced to cut rates soon to support weaker economic fundamentals.
The next round of Aussie strength against the New Zealand dollar may not occur until the easing cycle begins in New Zealand but in the meantime Morris expects the Aussie to find good support on any pullback before eventually moving to NZ$1.30-1.32 into 2009.
