Australia | Oct 07 2013
-Fed delay boosts Aussie dollar
-RBA and RBNZ seen diverging
-Oz economic outlook still fragile
-Growing focus on company profits
By Eva Brocklehurst
The decision by the US Federal Reserve to delay the winding down of the asset purchasing program, or Quantitative Easing as it is known, has put a cat among the pigeons of the financial markets. It seems that outgoing chairman, Ben Bernanke, is going to leave the decision on when and how much to his successor. When the Fed elected not to taper its asset purchases there was a flight out of the US dollar and towards currencies perceived as more risky, including the Australian dollar.
A continuation of the QE stimulus in a recovering economy, coupled with uncertainty over the US debt ceiling, the shut-down of government and the budget wrangling in Congress, means global markets are in for a bumpy ride this quarter, in the view of FOREX.com, the retail division of GAIN Capital Holdings. Volatile price action, amid plenty of market opportunities, will be the name of the game in the December quarter. FOREX.com, in its latest markets outlook, expects further US dollar weakness and the prospect of further QE will keep risk markets active. The online trading services business expects the bounce in the Australian dollar will run out of steam this quarter. The Reserve Bank of Australia is expected to act to limit the local currency's strength while, against the New Zealand dollar, the Aussie is seen weighed down by a potential rate hike in New Zealand.
The FOREX.com report highlights the critical nature of the final quarter of 2013 in terms of monetary policy in Australia and New Zealand. The RBA and the RBNZ may have to act to promote healthy economic growth in their respective economies. The difference between the two is that the RBNZ is faced with the prospect of raising rates to combat inflation, while the RBA may still have work to do in the opposite direction. Both banks have repeatedly expressed concern about their respective domestic currencies, believing them overvalued. This policy divergence may underpin AUD/NZD weakness this quarter.
The report does acknowledge there are growing calls for an end to the RBA's easing cycle, as there have been some positives from within the economy recently, particularly the housing sector. Better economic growth in the US, Europe and some positive signs from parts of the Chinese economy have also underpinned the calls. Nevertheless, the FOREX.com report points out that the weaknesses in the Australian economy, in terms of business sentiment and rising unemployment, may force the RBA to still cut the cash rate to a record low of 2.25% this quarter. Outside of the housing sector, the Australian economy is not seen responding in a meaningful way to the current loose monetary policy and this troubles the analysts, given the prospect of diminishing mining investment and a strengthening Aussie.
Investment manager Standard Life Investments is growing more confident that 2014 will produce the required growth, globally. During the last quarter financial markets were affected by improvement in the forward looking business indicators in developed markets, pricing a potential exit from QE, efforts to stabilise the economy in China, and the revival of political and geopolitical risk. This produced a shift to developed market assets. Portfolios are gradually becoming more cyclical and the investment manager is advocating a move towards sustainable earnings growth. Yield is still a feature, necessarily sought amid low global interest rates but, as the economic cycle becomes more positive, the growing issue is which companies can improve their profits.
Categories which are favoured include real estate equity. The investment manager is neutral on credit markets and cash and light in government bonds. In terms of fixed income assets it's the high yielding credit that makes up Standard Life's portfolio as opposed to investment grade or government bonds. Equities in the US are favoured and, to a lesser extent, Japan and the UK versus Europe and emerging markets. Standard Life continues to look closely at Japan as its performance could have a material impact on portfolios. The market has priced in the new monetary and fiscal policies of the Abe government, and it's now a matter of awaiting the structural reforms and associated tax decisions which the government is considering. FOREX.com will also be keeping a watch on the yen, expecting there's some way to go to reach the Japanese government's goals and this may trigger more currency weakness.
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