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No Respite For The Aussie Dollar

Discussion in 'The Economy' started by Tropo, 17th Sep, 2008.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    No Respite For The Aussie Dollar

    The background picture seems to be growing ever bleaker for the Australian dollar.

    The latest turmoil in the U.S. banking sector triggered a sharp rise in risk aversion, only adding to the Aussie's woes, as investors flee high-yielding currencies.

    Things were already bad enough for the Aussie, given its vulnerability to weakening commodity prices, the deteriorating Australian economy and the prospect of domestic interest rate cuts.

    Now these latest developments stand to exacerbate the Aussie's slide, as investors dash for cover from the fallout of the collapse of U.S. investment bank Lehman Brothers and whatever deep-set problems in the U.S. financial sector that may lurk behind this.

    "Risk aversion remains the key driver for markets and it looks unlikely to change any time soon," said senior currency strategist Tony Morriss at Australian bank ANZ.

    "The recent decline of the Aussie can be seen as a signal of extreme deleveraging across the market and a much darker outlook for global growth," he said.

    "That means there will be little interest to hold the Aussie in this environment," Morriss noted, adding that softer commodity demand is another negative factor for the currency.

    As a result, he said the Aussie could slide against the U.S. dollar toward its August 2007 lows under $0.7700 if the Aussie move below key support at $0.7900 for a sustained period.

    As a high-yielder that once benefited from the rise of the carry trade, the Aussie has been at the forefront of the losers during this latest crisis, with investors flocking back to low-yielding safe haven currencies such as the yen.
    "We remain bearish on the Australian dollar," said Hans Redeker, global head of foreign exchange strategy at BNP Paribas in London.

    "Foreign asset holdings of Australian dollar assets had increased significantly over recent years, in line with the global commodities boom," he said.

    "Furthermore, these Australian dollar positions were usually held on an unhedged basis. We are likely to see further unwinding of Aussie positions, especially as domestic liquidity conditions tighten, capital market financing gets harder and the positive terms of trade impact from Asia weakens," Redeker noted.

    Given the Aussie's commodity currency status, the downturn in commodity prices as global growth slows is a major knock.

    "Commodity prices are plummeting and as growth expectations continue to be lowered, commodity currencies are coming under intense selling pressure," according to technical currencies strategists at Barclays Capital in London.

    Moreover, Callum Henderson, head of foreign exchange strategy at Standard Chartered Bank in Singapore, pointed out Aussie depreciation is likely to be welcomed as long as it isn't inflationary.

    "The cyclical outlook for the Australian economy has deteriorated as high interest rates and an uncompetitive exchange rate hurt both consumption and exports at the same time," Henderson said.

    In the near term, the combination of slowing growth, falling rates, a large current account deficit and inadequate portfolio inflows will all weigh on the Aussie, he said.

    "Our forecasts have been anticipating a sharp decline for some time," he noted. "The risk is that it may happen sooner rather than later, extending losses already seen."

    On top of this, the minutes of the Reserve Bank of Australia's September policy meeting, released Tuesday, demonstrated no concern for the sharp drop in the Aussie and said "despite the recent movements, the Australian dollar was still a little higher in trade-weighted terms over the past year."