The AUD Strides Ahead
Brief Summary:
• The AUD has enjoyed relative strength against most majors in the last week. Sitting at around 1.03, near pre-75 basis point interest rate cut levels against the USD and setting records every day against the EUR.
• The US recovery remains tentative; Ben Bernanke reaffirmed the Fed’s commitment to further quantitative easing via ‘operation twist’, where the Fed swaps and purchases debts, essentially injecting cash into the economy through capital markets.
• Adding to AUD and commodity currency strength, Chinese growth continues, albeit at a slightly more sustainable pace than previously. Despite constant slashes to commodity price outlooks and demand, RBA minutes released this week show the resource economy still moving along strongly and companies report continued demand for their minerals.
• Further to the RBA minutes, they mention AUD (non mining) domestic conditions have improved slightly in response to interest rate cuts and their language signals a hold off on further cuts in the short term.
• The AUDUSD recovery since the 1st of June has seen a movement from 0.97 to 1.03, 6.2%, now may be a good time to pre-empt the next round of negative sentiment and lock in a rate above that highly sought after parity level. At current levels you can lock in above parity (on most amounts), to the end of January with forwards or World First can tailor you a range of outperformance option strategies.
•Please see below for specific currency commentary.
AUDUSD
• The AUD has strengthened about 2% against the USD in the past week, after dropping late last week on disappointing Australian employment numbers.
•AUDUSD now sits back at the levels seen at the beginning of May before the Euro crisis came to the fore and the RBA clashed rates.
• Negative sentiment surrounding Europe has subsided in recent weeks and things are looking slightly rosier for commodity currencies and risk assets.
• Monday saw the US releasing worse than expected retail figures, -0.5% from a +0.1% expected that gave rise speculation of, and later confirmation from Ben Bernanke , that the Federal Reserve may provide further Quantitative Easing to stimulate the economy.
•Quantitative easing involves the Federal Reserve purchasing assets, such as securities and debt assets, from investors. This injects further USD into the market as investors buy other assets with this cash. The result; the USD depreciates and other assets appreciate.
AUDEUR
• The Euro continued its decline, setting new records every couple of days. AUDEUR reached a new high, breeching 0.8400 before retreating on the AUD open.
• Kicked off two weeks ago with the shock reduction in EU interest rates, the relentless selling of the EUR has continued despite no new major news.
• The market sees no solution on the horizon for the Euro zone, the majority of the governments are newly elected and their fiscal reforms will take up to a year to be felt. Angela Merkel, the German Chancellor, remains steadfast against Eurobonds (that many see as a solution to the problem) and pro austerity, while the newly elected French and Greek government continue to push for softer austerity measures.
AUDGBP
• AUDGBP has traded within a fairly narrow range for the week, between 0.655 and 0.660.
• Slightly lower than expected inflation figures, 2.4% from 2.8% expected, were released on Tuesday.
• With interest rates at record lows of 0.5% and further quantitative easing announced last week, the monetary policy ‘toolbox’ is all by empty it seems for now.