The loss on the Australian dollar extended on Friday night as it tumbled below 93 US cents in offshore trading after the market concluded that interest rates here will fall in coming months.
The gloomy news on the economy has all but guaranteed that the next move in rates will be down: not at tomorrow’s Reserve Bank board meeting (although there is a slight chance of that happening) but at RBA board meetings next month or in October.
The Aussie dollar fell from 95.84 in Sydney last Friday week to 92.92 in New York early Saturday. That’s a fall of around 3% on the week, which is a substantial move, given the tight range it has traded in over the past couple of months.
The close is the lowest in more than two months and means the currency has fallen by more than 5% in just over a fortnight after peaking at over 98 US cents.
The prospect of lower interest rates drags down the yield for investors, an attraction of the currency and Australian stock, property and other assets, especially since the RBA started boosting rates last August in the final round of rate increases.
Helping to send the dollar lower has been the fall in commodities, which dropped 28% last month according to most indexes. Oil is down 18% in the last three weeks, but perked up on Friday on signs of renewed tensions between Iran and the rest of the world over its nuclear program.
Iran said on Saturday it would not back down in its nuclear row with major western countries powers, voicing defiance on the day of an informal deadline set by the West over Tehran’s disputed atomic ambitions.
Western officials gave Tehran two weeks from July 19 to respond to their offer to hold off from imposing more UN sanctions on Iran if it froze any expansion of its nuclear work.
That would suggest a deadline of Saturday but Iran dismissed the idea of having two weeks to reply.
The result will be a more volatile oil price this week, which could retrace much of the ground lost in the past three weeks. Perhaps Iran has a major oil sale to conclude and wants a higher price.
Oil prices jumped higher Friday after the Bush Administration set the weekend as a deadline for Iran, a major oil producer, to reply to an international offer of incentives for a freeze in its nuclear drive.
In reaction, New York crude for September delivery, rose as high as $US128.60 a barrel, before retreating to close at $US125.10, a gain of $US1.02 from Thursday’s finish.
In London, Brent North Sea crude for September delivery went as high as $US127.94 on Friday. It subsequently settled up 20 cents at $US124.18.
The AMP’s Dr Shane Oliver says the rapid downturn in the Australian economy is making it harder to see parity for the Australian dollar with the US currency, being reached in the short term.
"In fact with the market now pricing in rate cuts the ride for the $A could be pretty rough over the next six months with a fall back to around $US0.85 a distinct possibility.
"The long term trend in the $A is likely to remain up though in response to the long term rising trend in commodity prices but for now it is starting to look like parity has been postponed."
But any rise in tension in the middle east could see investors flock back to oil and other commodities, sending the Aussie dollar higher.
The AMP’s Dr Shane Oliver says the next few months are likely to remain rough for shares. Shares have the potential to rally further in the short term as extremely negative investor sentiment is unwound.
"However, it is too early to say that the bottom in shares has been seen. The still high oil price, slowing growth virtually everywhere, profit downgrades, inflation worries and the continuing credit crunch are all big short-term headwinds for shares and are likely to ensure a rough ride with possible further falls out to the normally weak September/October period.
"Notwithstanding all the short term uncertainties, we still see shares rallying sharply later this year as the oil price falls further, more central banks including the RBA start moving to cut interest rates helping to improve confidence regarding the economic outlook and as investors start to take advantage of attractive share valuations.
For those prepared to take a long term view current share market levels offer great long term opportunities, but of course there could be further weakness in the short term.
"Key signposts to look for to confirm that shares are on track for a sustainable rally are: a sharp and sustained fall in the oil price, reduced inflation worries, lower bond yields, more relaxed central banks, slowing US house price falls and a sustained improvement in credit markets.
Of these the oil price has started to move in the right direction, but needs to fall further, and the other signposts are yet to fall into place.
US shares slipped Friday, completing a volatile week, as investors chewed over a seventh straight month of job losses, a huge $US15 billion -plus loss General Motors and slumping the worst monthly sales figures for US cars for 16 years.
The three major indexes fell on Friday on Wall Street and ended the week with losses.
The Dow Jones industrial average was down by almost 0.5%, the Standard & Poor’s 500 Index was down 0.6% and Nasdaq composite index slid 0.6%.
For all of the market gyrations last week, all three indexes finished the week almost exactly where they started the week.
The Dow lost 0.4%, the S&P 500 finished 0.2% higher, and Nasdaq ended less than a point higher from where it started the week.
The Australian stock market is expected to open lower on Monday after a fall on Wall Street, but some companies will re
