The Australian dollar jumped more than one and a half US cents on Friday night as risk disappeared and investors cheered the return of the good old days by selling down the US dollar.
Oil closed above $US66 a barrel (up more than 100% from its lows five to six months ago) and copper also rose to be up 70% from its low as the US dollar again fell sharply, hitting a low of $US1.41.
The Aussie dollar closed at 80.10 USc after climbing above 80.50c, an eight month high.
The Aussie is now up 33% from its lows and well above the levels expected at this stage in the economic slide.
The Standard & Poor’s 500 index is up 36% since the low in early March.
Excitable international investors are pricing in recovery, even when it’s not going to happen for more than a year to any great degree.
Even though the flow of information from the US, Japan, Europe and the UK continues to suggest that the intensity of the recession is easing, there are few signs that there’s any meaningful recovery.
In fact, with General Motors scheduled to collapse gently into an arranged bankruptcy later today (and Chrysler, hopefully to emerge), markets are in almost celebratory mode: US bond rates, after spiking to 3.75% midweek for 10 year bonds, eased Friday to close at 3.46%, with much of the pressure off.
The greenback’s five-month low against major currencies saw sterling and the Australian dollar touch seven and eight-month highs respectively against the US dollar.
The euro hit its highest level against the dollar since last December.
Traders say both currencies are rising because of the return of risk appetite, which has in the past seen the US dollar weaken.
Sterling approached an eight-month peak near $US1.62 and had its best month against the US dollar since March 1985.
Not even those doubts about the huge US debt funding program and the record $US1.8 trillion American budget deficit were strong enough at the end of the week to limit the rebound in positive sentiment on Friday.
But the US 10-year Treasury still saw its largest two-month spike in yield in six years.
Bond yields fell Friday, but they are still up sharply since mid-March, when the Federal Reserve announced its plans for quantitative easing (by buying longer-dated Treasuries bonds to try and keep rates low).
The yield on 10 year bonds fell from 3.01% to around 2.52% when the move was announced on March 18, so the rise has been around 1%.
The rise has boosted mortgage rates, causing a sharp decline in applications in the past two weeks, which is not what the Fed wants to see.
The size of last week’s US government funding of $US101 billion did cause problems for the fixed interest market, but by Friday they had survived, but not without a rise in yields.
One of the reasons for the rise in the Australian dollar is the so-called carry trade: US investors are selling the American dollar to buy the Australian dollar and get returns well above what they can get in the US.
For example they can get over 5% for Australian government 10 year bonds against 3.45% or thereabouts in the US, or they can go short and get 3%-4% instead of under 2.5% for shorter-dated bonds.
Over the weekend there was another green shoot for markets to grasp.
Global car sales rose in April, thanks to a strong rebound in emerging markets, led by record sales in China, India and Brazil.
Canada’s Scotiabank said sales in those three markets rose to a record 10.3 million units (annual rate last month), up from 9.5 million in March and nearly one million units above the pre-crisis peak of 9.4 million set in May of last year.
Sales in the United States also rose briefly, but fell away, resulting in an annual rate of 9.3 million units, down from an average of 9.5 million in the first quarter.
Sales in Western Europe and Russia remain down 12% and 32% year-over-year respectively.
But annualised April sales of 1.2 million units in Western Europe was a small improvement over the first quarter as the car scrapping bonuses in Germany and France boosted sales.
