FYI | Jul 09 2008
By Chris Shaw
With increased concerns the global economy could slow further and so cause a correction in commodity prices ANZ Bank senior currency strategist Tony Morriss suggests the outlook for the Australian dollar is now less clear than was previously the case.
While this is in large part because the Aussie dollar is considered a commodity currency, other factors also influence its value, with Morriss suggesting the recent decline in the Australian equity market indicates domestic economic growth is headed lower and this has the potential to drag the currency down with it.
This is especially the case given in recent months the correlation between the S&P/ASX200 Index and the Aussie dollar has broken down while the continued link between the energy sector and the currency shows how much of the Aussie dollar’s gains have come on the back of higher oil and coal prices.
In Morriss’s view this implies the Australian dollar is at risk of a correction if commodity prices fall, with some consolidation of sorts already appearing to be underway given the magnitude of the gains in the energy sector and in oil and coal prices since the beginning of the year.
Technically Morriss suggests there is good support for the AUD above the US95c level but a test of this now appears more likely, with any break through the support zone extending down to US94.7c a sign the AUD was losing momentum. The next level of support is around US94c.
The key shorter-term may be cross rates, as while the euro/Aussie dollar remains range bound at present a return to risk aversion leads Morriss to suggest the Aussie dollar could start to lose ground against the Japanese yen. Already a six month uptrend has been broken and while initial support is at 101.80 a break through this level could signal a test of 97.80.
Weakness in the Aussie is not expected to be significant as long as the current bullish trend of the currency against the New Zealand and Canadian dollars and the British pound holds. Key support is at 1.255 against the Kiwi dollar so any break below this level would prompt a review of the bullish short-term outlook, while resistance is expected at 1.285 prior to any move back to the highs of a little over 1.36 in 2000.
Similarly support at 0.4780 is holding against the pound as the Aussie dollar consolidates recent gains, while a break below this level would indicate a near-term top for the cross rate. Any major correction would target the 38% retracement level at 0.4530, while the recent 11-year high of 0.4925 should act as resistance.
Medium-term Morris continues to expect the Australian dollar will move above parity against the greenback, forecasting a rate against the US dollar of US1.01 by the end of September and US$1.04 by the end of the year before a return to parity by the end of the March quarter next year.
