The Australian dollar is in for a rough ride as the deleveraging of commodity markets follows the continuing wind down of borrowings in the broader financial markets.
The AMP’s chief strategist, Dr Shane Oliver said in his latest weekly note that the $A is likely to have a ‘rough ride’ over the next year because of concerns about global growth and commodity prices.
On top of this there will be concerns also about slowing Australian economic growth and perhaps an interest rate cut which will reduce the attraction Australian dollar denominated assets have for foreign investors.
The Australian dollar fell under 90 USc in late trading Thursday night and remained there in Asian and scattered European trading on the holiday yesterday. It rose above 90 cents in US trading overnight.
The dollar fell to 90.97 USc last Thursday in Australia, and then tumbled two US cents in overnight trading and yesterday. It reached 94.98 USc on February 29, the highest since March 1984.
That’s a fall or more than three US cents from Tuesday’s close of around 93.26 USc. That was before the Fed’s 0.75% rate cut, which triggered a big sell off of commodities as financial investors such as hedge and mutual funds unwound positions to generate cash.
Many investors claimed the Fed’s cut was less than the 1% (or even 1.25%) expected but that sounds a bit like some post facto justification: the real reason is the belated understanding that if the financial system was quaking in the wake of the saving of Bear Stearns from collapse, then there’s no so-called hedge against inflation or uncertainty (the oft claimed justification for investing in gold and other commodities).
The smartest thing to be in when times are extra uncertain, as they are at the moment, is in cash or near cash securities, such as the US gold Treasury securities, especially the three month note which fell even further on Thursday ahead of the holiday weekend.
Dr Oliver though still believes that "high commodity prices and still relatively high local interest rates should ensure that the $A remains reasonably strong. Expect a range of around $US0.85 to possibly as high as parity against the $US."
Commonwealth Bank chief currency strategist Richard Grace says the Aussie dollar could fall to as low as 88c next month as higher borrowing costs for banks may drag on Australia’s economy.
But other analysts point out the Australian dollar has a five percentage-point rate advantage over the US which will support the currency. The return from investing in Australian securities is much more than in the US at the moment, even after the instability and uncertainty.
The US dollar was firmer yesterday in light Asian and European trading as it rose against the euro.
The greenback yesterday extended its recovery from a record low hit last week as investors again sold oil and gold and bought back the US currency.
Traders were heartened by the Federal Reserve’s aggressive efforts to ease the credit crisis last week. Dealers reckon the change in attitude last week that saw financial investors in commodities take profits and switch to cash or safe Government securities, has also been driving the strength in the US dollar as traders long the euro with good profits, decide to take them.
The euro fell to $1.5360 from around $1.5445 in late Asian trading on Friday, slipping further from a record high of $1.5905 struck late last week. It was back over $1.54 in US trading.
