Market Update – AUD / USD
In our last update we reiterated a positive view on the Australian dollar. Since then the US dollar put on a surge of strength in December, dragging the rate down to 0.8750, but has turned weaker again over New Year, allowing the Aussie dollar to regain the positive momentum and build a solid foundation for an attack on the recent highs around 0.9400. The fundamental outlook is relatively unchanged. The Reserve Bank of Australian raised interest rates three consecutive times into the end of the year (now 3.75%), and further rate hikes are on the cards for 2010. Crude oil for February delivery rose to new contract highs last week and gold has also seen a bounce after the December correction. All of these factors help to underpin the Aussie dollar’s dominance, and strong stock markets also mean that risk appetite is high, sucking more international investment flows in to the high yielding currencies. Perversely, any strength in US economic data have tended to help AUD more than the US dollar, because it’s taken as a sign of global recovery, boosting the appeal of higher risk investments. The only crack in the Aussie’s veneer could be that the so called “carry trade” (where investors borrow in low interest rate currencies and buy high yielders in order to profit from the interest advantage) is now a crowded trade, which at some point is likely to correct sharply if and when the markets next have a wobble and risk aversion rises. A major example of this was back in October 2008 when AUD and other high yielders dropped by up to 25% in just a few weeks, only to then regain all of those losses over subsequent months. So while the trend is definitely still UP for the Australian currency, beware of some bumps in the road. Some analysts are predicting that AUD will trade at parity to USD in 2010, the first time in 34 years.
The Aussie dollar weakened overnight after China moved to stem inflation concerns by raising capital requirements for banks, tightening lending conditions. That move will decrease the appeal of AUD to Chinese investors if it is followed up by further tightening, but with the RBA poised to move rates higher in the first half the market is taking the news in stride.
Any opinions expressed in this document are those of TorFX
analysts. Any analysis and/or forecasts provided are aimed at
helping clients understand market conditions and developing trends.
Clients are wholly responsible for their own trading
decisions.
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