Australian Dollar flying high

Posted: August 11, 2016 in Uncategorized

When all forecasts pointed to an Australian Dollar in the 65-70 cents the AUD is soaring towards its resistance of 78cents USD.

Another rate cut did exactly the reverse, as it was well predicted. And even a future rate cut (maybe the classic November racing day) will do little, as it is well in the cards.

As usual, with this market, you need to do the reverse of what everybody is doing…and you most likely will get it right.

Jokes apart, why so high and will it fall?

The Australian Dollar strength has a few reason to be.

  • Rates are low, but most market (eg Japan, Europe) are negative….so it is attractive – specially in one of the few AAA countries.
  • There a lot of Japanese investors for which Australia is perfect, specially with the AUD/YEN at 78 (the trends inverts close to 100, as currency wipes out yields)
  • It is actually not that the Australian Dollar is strong – the other currency are weak.

Now that Glenn Stevens (Chairman of RBA) is in his final days, it will be interesting to see who is next.

In his final speech he had essentially two messages

– Monetary policy cannot solve all the issues, it should be the Government.

– Even before interest rates goes to 1%, the RBA could start some form of Quantitative Easing

The future (6 month to one year): Yes the Australian will be lower as the economy cannot withstand such a strong dollar (that also bring us to an extremely dangerous deflationary environment) when two facts will come to the fore

  • Standard and Poor has Australian rating in negative watch, but they are waiting for the mid year Budget. If that fails to repair the Budget (which I think so, and it is correct to focus on the economy and not the Budget), by March 2017 – Australia will be downgraded to AA. There quite a few sovereign funds and banks that have precise limits on how much non AAA rated bond exposure they can have.
  • Australian Quantitative Easing (QE). This is the biggest reason. Everyone of our trading partners (USA, Japan, Europe and China) employ some form (overt or covert) of QE…so Australia will have to join the game to play (a bit like in a  fight…if you do not punch you go down…or up for the Aussie)

 

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