Aussie dollar weekly wrap

See the latest Australian dollar analysis here:

Macro Afternoon

A big week for the Australian dollar ended with it for the first time in the modern era above 1.05. The actual New York close of 1.0564 is more than 2.5 cents above the low for the week registered on Tuesday.

Up until the employment figures on  Thursday, the Aussie’s strength reflected a weak USD, so it moved with EUR and other currencies but skipped away into week’s end to be one of the strongest performers on the week.

There is little reason for traders and investors to sell the AUD at the moment. Indeed for exporters and import competing industries this is the worst possible environment and the most positive for the AUD.

Benign global growth at a time of USD weakness means upward pressure from all 5 drivers in our valuation model.

1) Global growth and commodities are positive even if the former is slightly downgraded from 6 months ago. Commodity prices are underpinned both by growth and a weaker greenback which makes AUD strength a leveraged bet to the USD.

2) Interest rates are moving higher around the globe with the Chinese hiking another 25 bps this week. The ECB did likewise, although Trichet’s comment that this wasn’t necessarily the start of a “series” tempered some expectations, even if we know he didn’t mean it. In the US, the pending closure of the Government has complicated Fed signals toward ending QE and helped pressure the AUD.

Against this backdrop the stronger than expected employment report that showed around 38k new jobs last month and, crucially, unemployment under 5% has put RBA tightenings back on the table in the minds of traders so negating any AUD negatives from a closing in the interest differential gap.

3) Investor sentiment toward the AUD remains positive and in general markets from equities to commodities and beyond appear to have a bullish hue further underpinning the AUD.

4) Technicals are also supportive even though the Aussie is at/through the top of its long run uptrend channel. Short term overbought risks remain high and a pullback is certainly possible but good solid underlying demand will see significant dips bought.

5) Larry Kudlow’s “King Dollar” is under attack. As the other side of the AUD/USD,  its weakness necessarily feeds AUD strength. All other things being equal, it also drives commodities higher because most of them are denominated in USD and act like “physical” currencies. Unless or until the USD turns or stops falling, this on its own can drive AUD higher.

So, all in all, the Aussie has had a great week underpinned by global and local support. These lofty levels may be reversed at some point in the next week but not sustainably as this benign environment builds and feeds on the Australian dollar’s strengths. We’d need to see a “risk off” event or something that seriously threatened domestic and/or global growth to knock the Aussie back sustainably. On that note, watch out for oil because its march will become a handbrake on the global recovery. Not yet though.

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  1. hope it goes to 3 dollars so i can go and buy a few houses in europe when the shit hits fan

    • See Cashman’s response below, you really dont have much of a idea about exchange rates do you.

  2. Ponzimania Notice the aud/uro still sits around 0.72.

    On another note – how will the 60 odd billion government spending cut in USA effect the markets at open Monday?

  3. Since the AUD seems to be keeping pace with the rising cost of commodities are we avoiding inflation? if the dollar was at 80c would the RBA have been forced to raise interest rates more than they have, killing the housing market?

    • In a word yes.

      In the parlance of our economic commentariat, the dollar is doing a lot of the “heavy lifting” for the RBA — keeping inflation under control, and wiping out the non-resource tradeables sector.

    • Glenn only has to lift off the brakes a tad and Australian’s love affair with housing will be in full bloom again.

      The only thing that will burst the bubble is an economic cataclysm of the like we’ve never experienced. We’re due. 20 years of unbroken economic growth, productivity growth in the toilet, the lazy being rewarded by the strong currency, and the innovative and hard-working being punished. We are sowing the seeds of our destruction.

      Come on China, burst that bubble!

      • I do not wish for economic cataclysm. Consider exactly what that would entail. Tremendous difficulty, strife, financial ruin and geopolitical unrest. My hope is for a gradual and managed wind-down of the China bubble. Apocalyptic collapse is not to be preferred. Be careful what you wish for.

        • I don’t wish for it, but we’re setting ourselves up for a fall.

          A China crash would not be an economic cataclysm for Australia if we had a mixed and diverse economy, but as we all know, our economic base is narrowing, becoming increasingly focused on the twin pillars of mining and housing.

          The economic cataclysm will be of own making. That’s the real tragedy.

  4. When gold (priced in $US) rebounded in late 2008 and the Aussie rose relative to the $US, gains in gold (in Aussie dollars, which is what we eat here) were effectively reduced.

    Now with the Aussie at these (historically high for the modern era)levels,if gold holds or rises (priced in $US)and the Aussie falls relative to the $US (which it could if a crisis resumes within the US)then Aussie dollar gains are magnified and you still hold gold.

    If gold is priced in $US and someone wants international asset exposure, relative to their Australian assets, they might consider gold while the Aussie is high so long as their view on gold was positive or steady for a reasonable holding period (due to the buy/sell costs). Physical metal is like real-estate in a sense, you can touch it and feel it (and its pretty cool to have too).

    Seriously though if the financial system was itself at risk a few years back and could be so again, why have all your assets within that system. Physical metal in your hands will not dissappear with a banking collapse (and I’m not a particularly a gold/silver bug – I just think real diversification is sensible).

  5. the aussie dollar is in the process of losing its ‘ RISK-ON” status ..which is clearly being subsumed by the green back.

    With the growing focus here on China- and the $US status as a reserve currency coming into question- I suspect that the $A will become a defacto reserve curency . it is backed by an undeniable soverereign (island)status – unlike the euro , substantial reserves of precious( to this global economy) metals ie gold, coal, gas, uranium, iron ore and a healthy financial system.
    The A$ may be dominated byma after byy become sought irla to this g ot metals and I include ye wi rSUSPECT hat eserve

    • regarding the scrambled text ….mangled by my crappy Microsoft 7 OS..
      I was saying the
      A$ may be dominated soon not by trade flows but investment flows … global investors looking for a risk-off currency.