Treasure Chest | May 18 2012
By Greg Peel
With developments in Europe sparking another “flight to quality” response from markets, “risk off” funds have been have fled mostly to the safe haven bond markets of Germany, and more particularly the US. Until last night gold has been liquidated rather than sought, allowing a record 14-day rally in the US dollar index.
With the story in Europe ongoing for the time being, Commonwealth Bank's forex strategists are assuming continued strength in the US dollar. This will in turn maintain pressure on the AUD-USD exchange rate which has now fallen below US$0.99.
However a combination of weaker data from China, a big rate cut from the RBA and the general macro picture has also seen a flight out of Aussie dollars against other major currencies, sending values lower against the euro, pound and yen. CBA believes these crosses are now set to rebound, and lists five reasons why.
Firstly, adjustments in the crosses due to all of the above have already been large. Secondly, the RBA will not be meeting again for another two weeks and the central bank's recent downward revision to its GDP forecast was larger than expected. Having made its adjustments, it is now likely the RBA will wait and watch for a while before making any further moves. Money markets have already priced in further rate cuts and are unlikely to price in more at this stage.
Thirdly, there are no major releases of Chinese data due over the next two weeks to potentially spark further Aussie weakness [although CBA is ignoring next week's flash manufacturing PMI estimate from HSBC]. Beijing has cut its reserve requirement ratio (RRR) and will not make another move immediately.
Fourthly, the new Greek election is not due until June 17 which suggests a month of little further newsflow. Volatility should thus recede in the interim, CBA suggests, providing for possible relief tick-ups in commodity and stock prices in between, as well as some profit-taking on currency cross positions.
And lastly, nothing much is new. The eurozone and UK are plagued by headwinds to economic growth and there is a good chance of further monetary stimulus from the ECB and Bank of England. The Aussie has fallen to below its ten-year average against the yen and despite lower Aussie bond yields, the AAA-rated paper is still attractive on interest rate differentials. The RBNZ is also talking of cutting rates.
It all adds up to a suggestion from CBA that the AUD-EUR, AUD-GDP and AUD-JPY crosses are a good short term bet.
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