The Aussie dollar rebounded sharply after experiencing a bout of weakness in early February that was caused by a correction in world stock markets and a surprise decision by the Reserve bank of Australia to keep interest rates on hold at 3.75% (investors had been expecting a move to 4%). Since then stock markets have recovered their poise and continue to make new highs on an almost daily basis. The RBA has also raised interest rates twice, giving the Aussie dollar a mouth watering yield of 4.25%. That’s in stark comparison to the US dollar, which has a yield of just 0.25%. In recent comments Federal Reserve officials have given markets cause to think that interest rates will remain at this record low for some months to come. Meanwhile, commodity prices have also recovered sharply in recent weeks, further underpinning the bounce in commodity related currencies.
Strong consumer confidence data helped the Australian currency yesterday, and a further boot today came in the form of a revaluation of the Singapore dollar. The administration moved the trading band to what it considers to be the “prevailing nominal trading rate”, signalling a shift in policy toward a “gradual appreciation” after strong growth data confirmed that the economy has recovered all of the output lost during the recession. By increasing the value of the currency, the administration is trying to combat possible inflation by moderating the pace of export growth and domestic spending. The move is being taken as a sign that other Asian nations will also move towards a monetary tightening stance, with rumours now swirling that China may revalue the Yuan. The upshot is that global recovery hopes have been boosted, helping the Aussie dollar, and denting enthusiasm for so called “safe haven” currencies like the US dollar.
The technical outlook is positive for the Aussie dollar. We are now testing the resistance level around 0.9400 that has presented a major barrier to this market over recent months. A daily close above here would suggest further gains in the short term.
Stock markets fall, dragging higher yielding currencies lower. Bank of England halts QE, for now. US dollar surges on safe haven buying.
Extract from our January 26th Sterling/Aussie update:
“…..weighing on sentiment toward the high yielders is the dramatic stock market sell off seen over the last few days. If that trend continues and develops into panic, we could see severe weakness in currencies like AUD, NZD and the Rand. Buyers of these currencies should therefore be on alert for opportunities.”
Stock markets rebounded slightly early in the week, but took a major drubbing yesterday, falling to three month lows. The market has been left punch drunk by the latest sell off, and every indication is that investor fear levels are starting to rise. This is exactly the sort of catalyst that could spark a dramatic unwinding of the so called “carry trade”, where investors have borrowed in low interest rate currencies like USD, JPY and even GBP, and sold those currencies to buy AUD. As the Australian dollar starts to weaken, traders may dump the currency as their losses mount, causing further weakness. The US dollar is benefitting from its safe haven status, and will continue to do so if the stock market “correction” continues. Meanwhile, the Aussie dollar was wrong footed this week after the Reserve Bank of Australia opted to keep interest rates on hold at 3.75%. Investors were fully expectant of a fourth consecutive hike to 4%. Disappointment led to selling, and the Aussie was soon testing the key technical support at 0.8750. It crashed below that level yesterday, reflecting the sharp falls in world equity markets. This is an important development, because it’s the first time the exchange rate has made a new four month low since the up trend first began in early 2009. The technical outlook is therefore negative, and we would only review this stance if the Aussie dollar can climb back above the 0.8800 level.
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.
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.
The trend for a stronger AUD and weaker USD continues, albeit we have seen a slight correction over the last week. Traders have been spoiled with Aussie positive news flow, headed up by the recent interest rate hikes. The stock market correction last week helped the US dollar slightly, and dented enthusiasm for high yielders. Meanwhile though, the basic building blocks of this trend remain intact. Stocks are on the up again this week, and gold is hitting new all time highs on an almost daily basis, reaching $1,168 per ounce today.
In the absence of any market shocks we continue to advocate a stronger AUD and weaker USD. Right now the market is testing trend support, and as you can see from today’s chart we have usually managed to surge up to fresh highs shortly after testing the trend line. That is no guarantee that the same will happen this time, but to repeat last week’s update, “let the trend be your friend”.
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.
A picture speaks a thousand words. There’s not much added value in me applying my technical view to this market. Clearly, the trend is positive for AUD, and as we techies love to say, “let the trend be your friend”!
For once, it’s blindingly obvious what’s driving this trend. The Reserve Bank of Australia have raised interest rates twice in two months, with their benchmark rate now standing at 3.5%. That compares with measly 0.15% offered by the US dollar. More importantly, the US administration have indicated that rates there will remain low for a long time, which is helping to drive a flow of funds out of the dollar, and into….Anything that offers a yield! That in turn is driving high yielding currencies higher. The high yield basket is typically the “commodity currencies”, like AUD, CAD, and the Rand. Those currencies have the added benefit of a soaring gold price to lend a further tailwind. Right now it’s hard to see any argument against selling USD / buying yield, unless we see another financial meltdown, or an increase in stock market volatility. High yielders benefit from the current conditions, but easily take fright if investors become risk adverse.
In the short term there is nothing to suggest an imminent trend change, so we will stick with the trend and suggest that the Australian dollar will continue to strengthen against its US counterpart.
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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