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 MARKET REPORTS |
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Currency
Australian dollar targets - US$1.0100 in 2008
April 24, 2008
Clifford Bennett, Chief Economist, Sonray Capital Markets
More than any other western economy, Australia is geographically and culturally positioned to benefit from the global shift of economic power to China/Asia.
This is the key fundamental reason for the long term and sustained price shift of the Australian dollar to above parity to the US dollar in the years ahead.
China is driving global economic changes
The driving force behind higher Gold and commodity prices is the rise of China, India, and Asia in general. The driving force behind globally low inflation levels is again China and Co. The driving force behind the decline of the once dominant US dollar is the resurgence and greater involvement with the global community of China, at a time when it can be argued that the US empire has, if we may, already peaked in influence.
The US economy is the great under-performer of this decade, and looks likely to remain so. The Euro represents a clear alternative as the primary reserve currency.
The economic and political diversification within the Euro zone, is not as many have argued its weakness, but is in fact the Euro’s great strength. For financial markets, as I suggested in 1999, this decade will and is denoted by its more sophisticated and balanced global capital flows. From an investment perspective the Euro zone already represents a diversified portfolio.
Capital will always seek new opportunity, and hence the shift away from the US dollar.
As previously suggested, it is not that the US will cease to be a major player, it is simply that the degree of dominance over the rest-of-the-world is being vanquished. The US dollar as a currency is left badly exposed. Equity market turbulence, recessionary economy, miniscule interest rates, combined with massive trade deficit all add up to a massive historical bear trend. Now when we add in the real world of financial markets the fact that most of the world, from private investors to governments and central banks are still even now caught over weighted US dollars, it is patently obvious that the US dollar can fall another 15% or 20% from current levels. Our Euro forecast remains 1.6200 this year and 1.8500 early next year.
While the Australian dollar has everything going for it from high interest rates to door-
step-of-Asia commodity producer, the US dollar risks collapse. Hence our forecast ofabove US dollar parity, set in mid 2006 for this year 2008, and our further forecast of 1.0800 to 1.1200 in 2009. When I made my parity forecast in 2006 for 2008, the local domestic banks and investment banks were dismissive, some openly ridiculing the forecast in the press. These organisations may now acknowledge, albeit late to the party, the risk of parity to the US dollar. It is very important however that exporters continue to multi-year hedge their currency exposure so as not to let the benefit of higher commodity process slip away from their balance sheets.
The short term catalyst for a higher Australian dollar is of course today’s inflation data
which will make it awkward for our naturally hawkish central bank to unwind the previous errors of this year’s rate hikes. I say error because just like the Federal Reserve in 2006, the Reserve Bank continues to maintain a hawkish attitude even as property markets are clearly plunging in some suburbs. In 2006 the Fed’s attitude was that those suburbs did not reflect the overall property market. The RBA is making the same error, and risks throwing the Australian economy down a similar path to that of the US. Nevertheless the environment for the Australian dollar will remain almost outrageously supportive.
While any further equity market shake out might generate some volatility in the
Australian dollar’s path, the trend will indeed remain bullish.
Parity for the Australian dollar may well be it’s long term fundamental value. In 1971
the Australian dollar traded around 1.4900 before falling to just 48 cents in 2001. Having been the most bearish forecaster of the Australian dollar on that run from 78 cents to 48 cents, I called it the “dollar that lost a dollar”. Having been the most bullish forecaster over the last few years, I suggest a market overshoot of the fundamental value of parity to the US dollar is highly likely. That is why in 2009 we may well see highs in the area of
US$1.0800 to US$1.1200.
In the short term, now that we have fresh highs, the Australian dollar may achieve 97 or 98 cents within weeks or even days.
More articles from this edition of CompareShares:
Investing: Where the wealthy stash their cash
Investor Profile: A mother's phenomenal trading success
Investing: Investors are wary of some defensive stocks, but not all
Currency: Australian dollar targets - US$1.0100 in 2008
Companies: Mortgage stress could grip 1m Aussies
Economy: May interest rate hike 50/50: economists
Inflation: Inflation a reminder of pressures: Swan
Super: Future Fund boss sees equity cash chance
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions. |
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