Thin Trading over the Holiday Period keeps the Australian Dollar
stable.
The relative calm in the equity and credit markets should encourage more
carry trade demand. If the calm continues, expect to see the Australian
dollar move higher across the board as it is also getting support from
higher commodity prices. Gold hit a seven week high helping the Aussie.
Sterling continues struggle against the EURO and minors as analysts
predict a slowdown in the UK a further cuts from the Bank of England. We
end 2007 a full 23 cents down on the Aussie from Jan 1st 2007, nearly
ten percent down over the year. Lets see what the new year brings us, it
is not looking rosy so far.
Stronger than expected PPI and CPI data from the US saw inflation
concerns surge and led many analysts to believe that the Federal Reserve
could not justifiably cut rates any lower for fear of sparking off
rampant inflation.
The US Dollar has risen to 2.0150 against the UK Pound, 1.4370 against
the EURO and 0.8573 against the Aussie. Combined with current risk
aversion by market players has seen the carry trade sell off and weaken
the Aussie.
We believe the downside risks to global growth are still prevalent and
this will continue to weaken the Australian Dollar for the time being.
AUSTRALIAN DOLLAR FIRMLY IN A CHANNEL AFTER FED ANNOUNCEMENT
Risk appetite has re-emerged in the market over the past week and this
has seen the Aussie dollar make up some ground against the US DOLLAR and
GB POUND. The AUD strengthened to 2.30 against Sterling and 0.8850
against USD before weakening off to 2.3150 and 0.8819 respectively.
The Federal Reserve’s rather muted decision to cut the base rate by
0.25% in the US did not inspire confidence in the markets as many were
hoping for a larger cut to resuscitate the global financial markets.
Markets tumbled on the news yesterday and as a result the Aussie
weakened off to the current levels.
The market will be looking for indicators that the Reserve Bank of
Australia will continue raising interest rates or whether it will stay
on hold in January. If inflationary pressures force the RBA to raise
interest rates again expect the AUD to strengthen back to the GBP/AUD
2.25 level and the GBP/USD 0.90 level. Until then expect fairly subtle
moves as traders try to get a feel for the direction.
Concerns about the outlook of global growth continue to keep the Aussie
dollar pegged at current levels. Again any concerns over the global
economy cause investors to exit high-yielding, riskier currencies such
as the Australian Dollar. Furthermore commodity prices tend to weaken as
forecasts predict slowing global growth.
As we all know Australia has benefited massively from the explosion in
commodity prices. If you believe the global economy will overcome the
current trials then the Aussie dollar will strengthen but if global
economic weakness materializes the Aussie dollar will weaken off.
Right now we expect global growth concerns to persist and thus we would
expect a weaker AUD.
Predictably, the Bank on England’s decision to cut interest rates saw a
softening of the pound against the majors.
Decent non-farm payrolls in the US helped allay any concerns that the
sub-prime credit crunch was having a wider effect on the jobs market.
This saw a healthy surge in risk appetite and in turn the resumption of
the Carry trade near the end of the week.
Investors and traders alike sought out the high yielding Antipodean
currencies. GB Pound / Australian Dollar fell from 2.36 on Wednesday to
a low of 2.3010 today
An unexpected jump in UK November manufacturing growth advanced and
produced raised prices. This caught the market by surprise raising the
Pound against the Australian dollar yesterday. However the UK is not out
of the water yet.
Some UK economists to call for a cut in interest rates as a matter
urgency to address the liquidity squeeze and a few even suggested a
half-point cut is required. This succeeded in making Thursday’s base
rate decision even more finely balanced and an even bigger release on
Thursday. The fact that the Bank of England have only ever cut rates
once before in December further supports the majority of expectations.
However the shadow MPC (chaired by my good friends over at the IEA in
Westminster), a group of UK economists which meets before the bank’s
decision to make its own call on rates, favoured a cut in a 5-4 vote.
With continued uncertainty in the market we could see the Australian
dollar rate fall back from it’s current rate of 2.3560.
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