How long can the Australian Dollar remain at these
levels?
Brief Summary:
• AUD reaches new high against EUR then falls 1 cent during the week
• RBA keeps cash rate at 3.5%
• Greece’s rating outlook lowered by S and P as economy weakens
Another positive week has seen the AUD trading higher against most of the majors 0.29% higher against the USD (1.0558) and 0.63% against GBP (0.6778); but a 0.1% decrease against the EUR (0.8533).
The big question everyone wants to know is where is the Australian Dollar heading in 2013?
Recently, positive sentiment has driven the AUD to a level that many, including the RBA, feel is overvalued. With the USD still suffering post GFC drag and the EUR and GBP underperforming can these levels be sustained? Let’s have a look at where we may be headed.
AUD trading over the last 3 years against the USD has seen a yearly average improvement from 2010 to 2011 by 11% and remained constant from 2011 to 2012.
AUD trading over the last 3 years against the Euro has seen a yearly average improvement from 2010 to 2011 by 4.9% and a further rise from 2011 to 2012 by 7.5%.
AUD trading over the last 3 years against the GBP has seen a yearly average improvement from 2010 to 2011 by 7.6% and a further rise from 2011 to 2012 by 1.81%.
What is holding the Australian Dollar above parity? And on average 20-30% above history averages against the major currencies?
• Interest Rates: Return on Australian cash is minimum 3.5%. Europe= 0.75% US=0% UK= 0.5%
• Lower interest rates attract overseas capital and gives the Australian Dollar underlying fundamental strength against all its currency piers.
• The Australian Economy; the only advanced economy to not go into a recession after the GFC in 2008.
• Record mineral exports, low unemployment, tight regulation, and a big pool of superannuation funds and savings. Australian government bonds are AAA rated investments; one of the only governments left to be AAA rated.
What will bring the Australian Dollar down fundamentally?
A rise in interest rates in Europe and the U.S, that provides a comparable return versus Australian return’s (this is not on the cards for at least the next 12 months – 18 months – until those economies improve)
Will the Australian Dollar reach 0.93c against the USD as it did in 2011?
• If a disagreement between European nations over the conditions of bailout installments, or decision’s, this causes investors to panic. They feel if these decisions are delayed or mishandled, this may cause a default by a country, causing a full blown financial crisis…..again.
• Share markets around the world are particularly sensitive to these types of announcements with stocks getting hammered quickly and without warning. The Australian dollar, being a risk-on currency tends to follow these trends.
• This is major cause of volatility in the Australian dollar. Spain, a member of the big four in the European economy (Germany, France, Italy and Spain), is a major piece of the puzzle, and has huge debt problems, massive unemployment, and a destroyed housing sector.
• The prediction of the value of the Australian dollar is linked directly to the unfolding events in Europe, which have been unfolding over the last 2 years. We easily have at least a year to go, if not more, until the uncertainty and the volatility return to more normal levels.
Sell offs:
The AUDUSD fell from 1.0790 on September 1st 2011 to 0.9385 on October 4th 2011. That’s a roughly 14% drop in 4 weeks. This is when Greece was front and centre of news.
The AUDUSD fell from 1.0474 on 30th April 2012, to 0.9580 on June 1st2012. This is a 9c drop in 4 weeks. This is Spain hitting the headlines before receiving their first $100B injection of cash to stop their banking system from collapsing.
Helpful Tips
- The Australian Dollar is a very volatile currency and considered to be overvalued by many. If you are interested in how we can reduce risk and protect your business’s exposure to the market then have a read of Hedging for Beginners
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By Ray Ridgeway and Matthew Dawe