Currencies | Jul 09 2009
By Chris Shaw
According to TD Securities, the Australian dollar is overvalued against its US counterpart at current levels and so there are both fundamental and tactical reasons to go short the Aussie at levels around US79c.
Fundamentally the group suggests in relation to commodity prices the Aussie dollar is simply too high as since early June the CRB index has gone through an 11% correction, which if translated literally to the currency would imply a dollar rate of below US75c.
Also, the group argues interest rate differentials and long-term trends support its view the Australian dollar is overvalued at present, especially as the dollar is presently about US10c above its long-term average of just over US70c.
Tactically there are also reasons to go short, as TD Securities points out while the market is incorporating some expectations of an increase in interest rates by the Reserve Bank of Australia (RBA) sometime soon, given solid consumer sentiment and retail sales data recently, the house view is a weak corporate sector will flow through to investment and the labour market and so inflation will not be a threat for some time.
This implies the next move by the RBA will be a further lowering of rates rather than a rate hike and as this outcome is priced into the market there is the risk of currency weakness.
Given the group’s view, it has gone short the Aussie dollar against the US dollar at US79.6c, with a target of US76c and a stop loss at US82c.
