by Chris Becker
The respite has only lasted a year or so, but the calls for Aussie dollar to be back to parity are now coming thick and thin.
Yesterday, Morgan Stanley released new research predicting the Aussie dollar would regain parity with the US dollar by year’s end, echoing recent predictions from Westpac and the CBA. From The SMH:
Global demand for AAA-rated paper will result in greater demand for the Aussie, said Morgan Stanley’s strategy team. The analysts said that high demand for Australian bonds, plus plenty of supply – $5.5 billion in new debt issued per month – will drive the dollar through parity by the end of this year.
Morgan Stanley were also much more optimistic about the capex cliff:
…the “capital expenditure cliff’ that Australia was supposed to hit as mining investment wound down had not been reached as expected.
The latest Australian Bureau of Statistics showed that while investment would fall in 2014, it is likely to be 9.3 per cent higher than originally predicted, which has prompted the Morgan Stanley analysts to rename the so-called cliff “a sharp descent”.
The broker’s analysts said parity was achievable despite further declines in the terms of trade.
“The exogenous factor which makes this possible is a once-in-a-generation increase in export volumes” which has kept the dollar robust, they said.
Hmm, yes, but what about price? Exports could double but if the price halves, or even further, then profitability would be crunched, as explained by Unconventional Economist last week. In short, higher volumes are no substitute for high prices.
The real play here is much simpler – the carry trade. When your central bank is holding rates at a stratospheric 2.5% (I know, its ironic) whereas the rest of the world has a 0 in front of their rates (or even a minus sign), demand for your currency – for your yield – will trump all else.
Aside from a very lazy superannuation sector and an uneducated public that doesn’t want to buy government bonds, foreign purchases (mainly Japan) are keeping a big floor under the Aussie – nearly 70% of all bonds are foreign owned.
Technically speaking, the Aussie is on a short term tear bouncing off its post-Xmas low and maintaining bullish momentum, now stalled at the 94.5 resistance level:
On a longer term time frame, it hasn’t made sense to be long Aussie since May last year, indeed maintaining a “lifestyle” short since late 2011 has been a good trade.
Current price action shows a series of lower lows (August 2013 and January 2014) with no new highs since the 97 handle was reached in October last year. There is solid support building at 92.
Is parity truly on the cards? If the RBA does not cut rates anytime soon (and even the most pessimistic suggest not until Q4) then a run up to 97 then 100 is definitely possible. This may change if prices close above the 94.50 handle (I’d prefer 95), and then yes parity here we come!
If you think its in-credible, look at the Kiwi, a victim of its own success (read: relatively high interest rates):
Time to get back on to Amazon and eBay and time for local retailers to start sweating?