Risk Aversion and falling Commodity prices keep Aussie Dollar from
rising any further
Two of the core pillars of recent Aussie dollar strength have taken a
severe beating this past week. Firstly, we saw the price of commodities
and precious metals suffer a severe correction at the end of the week.
Fears of a slowing global economy saw many investors pare back their
positions in these investments which traditionally hedge against
inflation. We suspect that this is a short term move as global interest
rates are heading lower and thus inflation will start rearing its ugly
head.
As Australia is a commodity producer these falls hurt the Aussie dollar
more than most. Fears pervading the market after the collapse of Bear
Stearns have kept carry trades subdued. Traditionally investors will
borrow Japanese Yen cheaply to invest in high yielding currencies such
as the NZ Dollar and Australian Dollar. With the dramatic appreciation
in the yen many carry trade schemes were burnt badly. The Aussie dollar
has fallen off its recent highs against the US Dollar to hit 0.90 cents
while even the under pressure Sterling has pulled back to 2.20.
Strong employment figures in Australia and increased risk appetite
see Aussie strength but beware of market turmoil
The Aussie dollar has fluctuated wildly this week as market sentiment
mimics a manic depressive with mood swings every few hours. The Central
bank intervention on Tuesday brought some relief to the markets and
immediately saw investors plough back into high yielding currencies like
the Aussie dollar. Sentiment then reversed as the Carlye Capital Group
went into liquidation and fears over the solvency of Bear Stearns
refused to go away. The strong rise in the Yen does not appear to have
spooked carry traders as strong buying has seen the Aussie dollar reach
0.9434 to the US Dollar and back down to 2.1470 on GB Pound. Stronger
than expected employment figures in Australia have helped sentiment
about the overheated Aussie economy and of course gold and commodities
continue to climb higher boosting Australia's trade balance. Watch out
on Friday though as we are in for one last day of extreme volatility
this week.
Yield advantage and ‘decoupling’ story keep Aussie Dollar strong
With investors, rightly or wrongly, less concerned with the risk of a
global slowdown the high yield on the Australian dollar has served to
attract buying interest internationally. AUD has stormed to higher
levels against all the majors. AUD/US Dollar is trading a 0.92 cents and
GBP/AUD is down to 2.12. The high yield in Australian dollars (Interest
rates are at 7.00% and expected to rise) is attractive to global
investors when compared to falling interest rates in the US and the
United Kingdom.
Added to the yield advantage the Australian economy has yet to feel any
effects from the US slowdown. This has given weight to the theory that
some countries are decoupling from the US economy. Current economic
theory holds the view that a slowdown in the US results in a domino
effect dragging other economies down. However, high commodity and metal
prices, key exports for Australia, and increased demand from Asia has
resulted in a booming Australian economy. This growth is in stark
contrast to a weakened US economy and fears of a similar slowdown in the
UK and Europe. We expect the AUD to continue making gains against the
majors unless a slowdown materializes in Asia.
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