These days, I feel like you could take that title and substitute pretty much any currency for the Australian Dollar.
Let’s face it- the EU sovereign debt crisis has hit a number of
currencies extremely hard, as investors have fled anything and
everything risky, in favor of the US Dollar, Swiss Franc, Japanese Yen,
and Gold.
Still, the Australian Dollar merits special attention, because in
the forex markets, it has come to be a symbol of risk-taking. For
veritable years, every credit expansion and economic boom has been
accompanied by a surge in the value of the Aussie, and 2009 was no
exception. As the global economy recovered and risk aversion ebbed, the
Australian Dollar rose by more than 40% against the USD. It has been
helped in its upward course by Chinese demand for its natural resources
and strong interest rates, especially compared to the rest of the
industrialized world.
That the Australian Dollar has already fallen 14% (from peak to
trough) against the US Dollar over the last month is less due to
economic and monetary factors, however, and more the result of an ebb in
risk-taking. “The Australian dollar is considered a barometer of global
risk appetite.
Its fall reflects the quick change in mood, as Europe’s debt problems
and China’s monetary tightening plans cloud expectations for the global
economic growth,” summarized one analyst.
Specifically, investors are growing increasingly nervous about the
viability of the carry trade, of which the Australian Dollar has been
one of the primary beneficiaries. Uncertainty surrounding the fiscal
problems of the Eurozone has catalyzed a spike in volatility, and
investors have responded by rapidly unwinding their carry trade
positions. Ironically, this caused a temporary upswing in the Euro, at
the expense of the Aussie: ” ‘The euro rally isn’t that people like the
euro. Investors have decided they want out of risk.’ The way to remove
that risk from portfolios is to pay back the euro loans by selling the
Australian dollar.”
From another standpoint, the yield advantage associated with
holding Australian Dollars is no longer enough to compensate investors
for the added risk. After adjusting for inflation, real interest rates
in Australia are only about 2.5% (the nominal benchmark rate is 4.5%).
This is still 2.5% higher than the benchmark US Federal Funds Rate, but
not very attractive if you consider that the Australian Dollar has
fallen by more than 2.5% against the US Dollar in several individual
trading sessions in May. Moreover, the Reserve Bank of Australia (RBA)
is signalling a pause in its rate hikes. If futures contracts are any
indication, the Fed and the ECB will raise their respective interest
rates before the RBA moves again.
Going forward, the consensus is that a sustainable level for the
Australian Dollar based on current fundamentals is probably around .75
AUD/USD. However, the Aussie rallied 5% against the US Dollar last week,
which suggests that investors still aren’t ready to give up completely:
” ‘The environment is not yet ripe to get truly bearish on the
Australian dollar,’ said Commonwealth Bank Strategist Richard Grace.
There are positives on the horizon, namely a better outlook for the U.S.
and a calming of the Greek crisis, he said. He’s forecasting a return
to $0.87.” Personally, I could see the Aussie going either way. Parity
probably isn’t on the table anymore, but virtually everything else still
is.
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