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Forex - Yen
AUD/USD: rollercoaster to parity
June 21, 2007
Clifford Bennett, FxMax
The Australian dollar is in for a roller-coaster of a ride to parity with the US dollar, which is now achievable next year. Clifford Bennett reports
The Australian dollar is going to parity, US$1.00, as has been the FxMax forecast since last year, and it now appears our target could well be achieved in 2008. The mid 2008 target has until now been 93 cents, with US$1.00 expected in 2009. However with our end of year 2007 target of 89 cents now within sight, it is possible parity will come sooner rather than later.
The forces behind the rally of the Australian dollar are, and remain as they have been for the last couple of years:
1. Relatively high interest rate settings by our central bank attracting global investment portfolio flow;
2. A firm, albeit not out-performing, domestic economy;
3. A major commodity exporter on the doorstep of a booming Asia, especially China;
4. A long term broad weakening trend in the value of the US dollar.
In a nutshell, if China is booming, and Australia maintains it’s excellent trade relations with China, our commodity exports are going to be well bid for many years.
Then there is the added bonus to global investors of the high yield available in the AUD. As if that was not enough, the US dollar is in the “midst” of a long term historic price shift to much lower levels. So it is not difficult to deduce that a good place to be short the falling US dollar, is by way of the Australian dollar.
The strength of the Australian dollar really has little if anything to do with the state of the domestic economy. In fact both the Australian dollar and the Australian economy are being driven by the same originating force; the rise of China to a dominant global economic power.
The China story is symbolic of what is happening the world over, with “intra-regional” trade now beginning to displace the “US centric” trade model of previous decades, in South America and Europe, as well as Asia. This is the first decade of truly balanced global growth, and also the first decade of relatively balanced global investment flows. While the US once sucked in 70% of global fresh investment capital, the future, and indeed the near future, is likely to see global fresh investment weightings more in the order of 40% USA, 40% Europe, 20% emerging markets.
This is a huge shift in global business and investment psychology, and will become the new entrenched multi-national ethos.
For the once mighty US dollar it is the end of an era. The Euro will increasingly be seen as an equal or even superior reserve currency to the US dollar. Around the world central banks will continue to buy US bonds, but perhaps at one tenth the previous rate, as they seek to diversify more into the Euro predominantly, but also other currencies.
It may be that central banks even begin to see the quite liquid Australian dollar, backed by sophisticated financial markets and a sound political and legal structure, as a valid currency of diversification away from the US dollar. In which case, the Australian dollar rally in a long term sense, has only just begun.
Of course no market moves in a straight line, and as the rally of the Australian dollar increasingly hits the front pages of various media, we are reminded of just how long the Australian dollar the market might have become. Subsequently there is increasing risk that a serious correction may be due, just as no one expects it, as is the norm.
It is clear that many of the domestic banks, and several global investment banks who told their clients that the AUD did not belong above 80 cents, that 85 cents was a temporary stretch, that calling the AUD to parity was a baseless view, are interestingly now at 87 cents, suddenly bullish!
This is a definite warning that the whole investment community, at least the short term to medium term speculative market, is now long the Australian dollar, and also that all the AUD bears have finally thrown in the towel, got out of their shorts, and gone long. If this is the case, as I suspect it is, then any catalyst could cause quite a shake out, as in a sharp Australian dollar fall.
Such a move could retrace over a few weeks toward 84 cents, perhaps even 83 cents. These levels would represent another excellent long term buying opportunity. The fundamentals will not have changed, just a normal market correction in what is without doubt the biggest major up-trend the AUD has seen for decades, would have unfolded.
Technical Analysis provides some clues as to whether such a correction was getting underway. A move back below support at .8640, would suggest the sellers, predominantly profit takers, were beginning to dominate. With so many people around the world now long the AUD, a snow balling of stop loss sell orders to significantly lower levels would then become the most likely short term scenario.
This process would probably require a catalyst however, and as is the nature of fresh market triggers it is likely to be an unexpected event. The most likely suspect is however the Yen carry trade starting to unwind. At some point the trade surplus and steady recovery of the economy of Japan is likely to lead to a sharp up move in the value of the Yen against the US dollar.
The temporary side effect of a strong Yen rally, unwinding of the Yen carry trade, could see a panic selling out of the Australian dollar leg of those trades. In such circumstances 84 and 83 cents become reasonable short term targets.
That kind of sell off would last perhaps a few weeks, but eventually the overall decline of the US dollar, the continued strong growth of China and Asia, would lead to a steady re-instatement of the long AUD investments currently held by funds and individuals from Senegal to Switzerland.
Therefore the long term outlook remains decidedly bullish for the Australian dollar:
- 89 cents medium term
- Perhaps 93 cents by year end
- Parity to the US dollar is now visible on the global currency horizon for 2008.
The point here is that for the first time investors need to be mindful and watchful for the potential, inevitable at some point, sharp 3 to 4 cent correction, as a normal part of the process of a major bull trend, and the expected rollercoaster ride to parity, US$1.00.
Clifford Bennett, Chief Economist, FxMax. For further information regarding FxMax products please email Clifford Bennett.
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The rise of the moral investor
Weapons of wealth destruction
Stock of the week: ANG
Wine still a little sour
Forex: managing volatility
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Disclaimer: Any degree of success, profit or loss, achieved as a result of using FxMAX services, is entirely the client’s achievement. Any involvement in any market, including foreign exchange, either alone, or with the advice of any individual or organization, can result in significant financial loss. Past results do not necessarily indicate future performance. In viewing or using FxMAX services the client must understand that FxMAX intends to provide a positive contribution to the clients involvement in foreign exchange markets, but cannot guarantee such intention will be realized. Regardless of past track records any individual or organization can fall prey to sustained periods of loss, of having an incorrect market view, of getting it wrong. The client uses the services of FxMAX entirely at their own risk. FxMAX accepts no liability whatsoever for any loss incurred by the client of any nature whatsoever. Neither will FxMAX make any claim to any profits or portion thereof, achieved by the client of any nature whatsoever, as a result of using FxMAX services.
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