The RBA has made a lot of noise about the economic benefits of a lower Australian dollar recently and most businesses involved in the local tourism sector, and exporters in general, agree a lower currency would help them remain competitive.

Some manufacturers might beg to differ however. In theory a lower Aussie dollar can help make locally-manufactured goods more competitively priced compared to imported goods. In reality, things aren’t so simple.

A 10 per cent drop in the Aussie dollar will, eventually, make imported goods more expensive. Crucially though, this will not necessarily translate to a 10 per cent increase in business for the manufacturer. What it can do is actually increase costs by 10 per cent without a noticeable rise on the other side of the ledger.

Some OzForex clients are expressing a preference for a higher Aussie dollar given they import many raw materials that go into the manufacturing process.
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The Australian dollar has hit new record highs in recent months rising to a 28 year high against the pound sterling (GBP) and also against the Japanese yen (JPY). Despite speculation that the recent RBA interest rate drops would substantially impact its valuation, the strong Aussie dollar looks like it’s here to stay awhile. Australians can take advantage of favourable currency exchange rates by looking overseas for some great buys.

Travelling overseas
Have you always dreamed of wandering through the beautiful cities of Europe or catching a glimpse of the bright lights and movie stars in the US? Perhaps combining skiing, culture and sushi in the normally expensive Japan is also within reach. Now is the perfect time to head overseas and do some international travelling. With airlines competing hard to offer the best fares, Australians will find their dollar going much further at popular destinations like the States. There’s no better time than now to plan your trip as experts recommend travelling sooner rather than later.

Meanwhile, if you have a trip planned in the next 6 months or so, it could be worth stocking up and purchasing a portion of the foreign currency now on a Prepaid Foreign Currency Travel Card rather than waiting until you arrive.

Buying online from overseas
The internet has made it easy to make purchases from overseas in foreign currency. While Australia lags behind other countries when it comes to online buying, experts are predicting that the recent strength of the Aussie dollar will have online expenditure figures soaring in 2013.

Books, CDs, electronics, gifts and clothing are just some of the goods that Australians are snapping up from international stores and having shipped to their door. Technology items such as computers, laptops and cameras are popular buys for their higher price points and the fact that they don’t incur an import tax, unlike cars. Remember, that if you are shopping from overseas to check for any additional charges for international buyers and that the seller does indeed ship to Australia.

Smart investment and business
Investors should take a good look at where their investment dollars are tied up and the impact the currency rates could have on business returns. As is the case with most money matters, a strong dollar can have both positive and negative effects depending on the vertical and the nature of a business’s operations. Overall, it’s a good time to consider foreign investments while some Australian companies may be able to take advantage of the strong dollar by sourcing cheaper resources and suppliers from overseas. However, other local businesses, especially exporters, may suffer as a result of higher price points that make them less competitive in the international marketplace.

When it comes to getting more bang for your buck, it’s about knowing where to spend your money to extract the most value. Money experts are expecting the Australian dollar to remain strong for the coming months so it’ll be smart to take advantage of these great exchange rates soon.

No matter what your transfer reasons are the strong Australian Dollar means you end up with more in your pocket.

To speak to one of our accredited OzForex dealers about your foreign exchange requirements call 1300 300 424 in Australia (0845 686 1950 in the UK; 1800 680 0750 in Canada or 0800 161 868 in NZ) or register online.

Registering with OzForex is FREE and you can view their live dealing rates immediately. Remember to mention you are a client of bextexchangerates.com.au you will receive your first two transactions fee FREE.

Ozforex


How does the gyrations of the Aussie Dollar affect Shoppers, Travellers, Importers, Exporters, Manufacturers, Tourism operators, Educators?

Strong Australian dollar (above 0.90 USD):

Winners

Shoppers: Imports like electronics and cars should be cheaper in coming months if retailers pass on savings from new stock. Buying online from places like the US and UK will also become cheaper for consumers.

Travellers: Overseas holidays will be less expensive, with more buying power for everything from hotels to shopping. Airlines pay for fuel in US dollars so in theory fares should also be cheaper. Again, this depends on whether airlines pass on savings.
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The Australian dollar nursed its losses across the board today as investors pared long positions amid uncertainties about China’s economic growth and weakness in Asian stocks.

The dollar fell as far as $US1.0341, from $US1.0392 in New York, having lost 1 per cent this week. It was last at $US1.0368 and looked set to test last week’s trough of $US1.0336. A break there would take it to levels not seen since January 17.
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The mining boom is making Australia potentially wealthier, but also creating problems because of the high exchange rate. What should government policies be?

There are two issues, and it is very important that they are distinguished. One concerns taxes and the other concerns the exchange rate.

The aim of taxation is that some of the benefits of the boom go to the Australian community as a whole and not just to Australian shareholders and employees, and certainly not mainly to foreign owners. Taxation is probably the main channel (though not the only one) through which Australia benefits from the boom.
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Well, not if you are short the AUD because of all that hard landing business. Or, if you are an Australian exporter.

The Australian dollar has long been seen as a China/commodities trade, but Macquarie’s Brian Redican reckons that’s no longer the case. The currency is increasingly influenced by external factors, rather than the country’s own ever-growing mining sector, or its monetary and fiscal policy.

And this, he says, is a momentous shift — so much so that Macquarie now sees the AUD remaining around its current levels for several years, and only gradually sliding to $1.05 by 2015. Their previous forecast was a fall below USD parity by the end of this year.

Those external factors will sound familiar:

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The Australian dollar nursed losses against its US counterpart on Monday, weighed by uncertainty over China after the world’s second biggest economy posted a shocking trade deficit.

The shed around third of a cent to buy $US1.0526 in late trade, versus $US1.0567 in New York late Friday.

Traders cited selling from macro-funds, with talk of buying interest all the way down to $US1.0500.
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Joseph Capurso and Richard Grace of the foreign exchange team at Commonwealth Bank of Australia have conceded that their recent forecasts have been wrong.

They did not foresee that the ongoing sovereign debt crisis in the EU would have so little of a negative effect on global growth and therefore the commodities-linked Australian dollar.

The strategists have now amended their forecast for the exchange rate from $US0.95 in June 2012 to $US1.08 until September, and $US1.10 in early 2013.
AFR


Thursday, 13 September 2012 – Ozforex
———————————————-
Australian Dollar: The Australian dollar has remained supported in the mid 1.04’s and daringly undertook a challenge for 1.0500 as the primary funding vehicle for the euro-zone was given the all clear to partake in the Europe’s economic recovery. The market reaction was positive as investors took risk on board and closed out short positions with the Aussie rallying to highs marginally above $1.05 against the Greenback as a result. Settling back around similar levels to yesterday, the key focus today will be the outcome of the FOMC meeting in the US where many are keenly anticipating stimulus measure to be announced. If so this would have a positive effect on the Australian dollar as a result of the measures supporting global markets, as well as directly weakening the US Dollar as the underlying currency.

Feb 21, 2012 update:
————————————–
Joseph Capurso and Richard Grace of the foreign exchange team at Commonwealth Bank of Australia have conceded that their recent forecasts have been wrong.

They did not foresee that the ongoing sovereign debt crisis in the EU would have so little of a negative effect on global growth and therefore the commodities-linked Australian dollar.

The strategists have now amended their forecast for the exchange rate from $US0.95 in June 2012 to $US1.08 until September, and $US1.10 in early 2013.
Source AFR

Feb 09 2012 Lateline ABC Transcript
———————————–

TICKY FULLERTON, PRESENTER: The Australian dollar is set to remain a painful issue for large parts of the business community this year with all the signs so far indicating it will track higher rather than lower. So will there be any relief as 2012 unfolds?

Well in the third part of our week-long series, our experts tell us where they see the Aussie dollar heading this year.

MICHAEL BLYTHE, CHIEF ECONOMIST, CBA: Well our forecasts have the Aussie at parity with the US dollar at the end of 2012.

Now, the Aussie dollar’s performance has been one of the big surprises the last year or so. It’s been amazingly resilient given the global backdrop. In fact I’d just flown in from Mars and you’d told me the global story and asked for a currency forecast, I probably would have said about 70 cents.

Now, the Aussie’s not immune to what is going on. We think it will drift from around $1.07 today down towards that parity level at the end of 2012.

AUD/USD: 100 c

GERARD MINACK, CHIEF ECONOMIST, MORGAN STANLEY: I think it’ll be around 90 cents. The key driver of the currency is really global growth and commodity prices.

There are some other things that play a role, but that’s the big picture thing that drives it. And I think we’re going to see slower global growth, commodity prices come off, so I think the risks are the currency goes down, not up this year.

AUD/USD: 90 c

TIM HARCOURT, ECONOMICS PROFESSOR, UNSW: I’m picking at $1.07, just above parity.

I think it’s principally a story of the power proximity because China and India, Indonesia are demanding Australia’s resources, and for that reason I think the dollar will be strong and the rest of our fundamentals are closely tied to the emerging markets, where again, that’s where most of global growth’s gonna come from.

AUD/USD: 107 c

ALAN OSTER, CHIEF ECONOMIST, NAB: Well we think the Australian dollar where commodity prices are currently around will be good value at around about $1.01.

So we have the Australian dollar by the end of the year around parity. I think it’ll bounce up and down a bit in terms of weakness in essentially the US dollar because of quantitative easing being offset a little bit by further falls in commodity prices as we go through.

AUD/USD: 101 c

SCOTT HASLEM, CHIEF ECONOMIST, UBS: We’re looking for the Australian dollar to be around $1.05 against the US dollar at the end of the year.

In the near term, with the RBA lowering the cash rate and some more weakness coming through in the global economy, we do think the Australian dollar could lose some of its recent strength, maybe even head down towards parity again.

But again, over the course of the year with the global economy stabilising, looking a little bit better and the Australian economy looking a little bit better, we do expect the strong fundamentals of China growth, demand for triple-A-rated debt, which Australia has, is all gonna help the Australian dollar remain reasonably high.

AUD/USD: 105 c

TICKY FULLERTON: So the good news for exporters and import-competing businesses is that three of our four experts see the dollar falling this year.

The bad news is: not by much. Tomorrow night our experts will be turning their attention to a key indicator of the health of the economy, and that’s unemployment.

———————————
December 2011
———————————
As we approach year-end 2011 the Australian dollar is hovering around parity. So armed with the clarity of hindsight we re-visit our selected analysts forecasts from back in May 2011, some of their predictions are doing better than others… So far Matthew Sherwood from Perpetual and Nigel Stapledon, UNSW are looking the most on the money correctly predicting an AUDUSD rate of around 99 cents. But given the volatility of the AUD this year, with a month to go any one of them may still be in with a chance.


Source for following predictions: Australian Financial Review May 7-8, 2011

Commonwealth Bank currency strategist Richard Grace says the local dollar will get to $US1.12 by September driven by the terms of trade boom, and by increasing interest from foreign investors in diversifying into currencies other than the greenback.

National Australia Bank John Kyriakopoulos is slightly more cautious. Although after its recent surge he upped his short term forecasts by as much as 4 cents, he believes the local dollar will fall to $US1.02 by year end. He says the currency appears expensive at $US 1.10, based on measures such as the terms of trade and the current account.

ANZ Bank says its official Australian dollar year-end forecast is $US1.03. It sees the currency at par with the greenback until at least July 2012 and says weakness in the US dollar is likely to persist owing to America’s low interest rates, large fiscal hole and ailing housing market.

JPMorgan economics team local currency year-end forecast of $1.04. It believes the underlying fundamentals appear strong, and the dollar will hold above parity until the end of 2012, when the US Federal Reserve is likely to begin raising interest rates.

Citibank analysts say the Australian Dollar is overvalued by about 6 per cent. they believe that while the currency may go higher in the short term, it is difficult to make the case to long-term investors for buying the dollar at present values.



Source for following predictions: ABC Lateline – Experts revisit AUD predictions, May 11 2011

Andrew Pease, Russell Investments We’re still fairly cautious about the outlook for the rest of the year and we do think it will end the year weaker, potentially below 90 cents.

And the reasons why we think that are the case by the end of this year, I think the markets will start to be looking at the timing of the first American rate rise, and also we think that commodity markets have probably run too hard and with China slowing we’ll see commodity markets come back quite a bit.

Nicki Hutley, KPMG We’ve already seen the ECB start to nudge up rates and sooner or later the Federal Reserve is going to have to get of its hands and do likewise. We are seeing quite pronounced recovery there and that will gather momentum and we all know the Fed is, if nothing else, very hawkish on inflation, so they will act.

And I think that will make a psychological change to the market, bring about that psychological change that will see a shift back down to 90 cents by the end of the year.

Besa Deda, St George Bank We’re looking for the Aussie dollar to finish the year at $1.02. That is a little bit lower than where it’s currently trading. The main reason is that we are forecasting slower growth in the Chinese economy and we do think that commodity prices will peak in the second quarter of this year. Also, interest rates in other major economies are starting to move higher or will start to move higher in 2012 and the currencies of those economies will start to price that in and that will pressure the Aussie dollar lower against these currencies.

Nigel Stapledon, UNI. OF NSW My feeling in the second half of the year is that the balance of news is – it’s a lot more even. I think there’s a fair probability that the news on the US will continue to get a little bit better, but it’s a little bit more problematic about China and the net balance of that could be slightly negative for the Aussie dollar. So, I’d be pretty comfortable with a forecast of around sort of 99 cents, a dollar.

Matthew Sherwood, Perpetual I continue to expect the Australian dollar will depreciate against the US down to around 99 US cents. And the reason for that is a very solid US recovery is brewing at the moment and core inflation in the US economy is clearly rising. And as a result, I tend to think that’s going to bring the US Federal Reserve out of its trenches earlier than market expectations.

Now, whilst being hawkish on the US Fed has not been a policy which has rewarded investors in the past six months or so, my suspicion is we’re seeing the clear signs of a very solid and sustainable recovery in the US, and because of that, the US dollar would be expected to rally.


Feb 21, 2012 update:
————————————–
Joseph Capurso and Richard Grace of the foreign exchange team at Commonwealth Bank of Australia have conceded that their recent forecasts have been wrong.

They did not foresee that the ongoing sovereign debt crisis in the EU would have so little of a negative effect on global growth and therefore the commodities-linked Australian dollar.

The strategists have now amended their forecast for the exchange rate from $US0.95 in June 2012 to $US1.08 until September, and $US1.10 in early 2013.
Source AFR

Feb 09 2012 Lateline ABC Transcript
———————————–

TICKY FULLERTON, PRESENTER: The Australian dollar is set to remain a painful issue for large parts of the business community this year with all the signs so far indicating it will track higher rather than lower. So will there be any relief as 2012 unfolds?

Well in the third part of our week-long series, our experts tell us where they see the Aussie dollar heading this year.

MICHAEL BLYTHE, CHIEF ECONOMIST, CBA: Well our forecasts have the Aussie at parity with the US dollar at the end of 2012.

Now, the Aussie dollar’s performance has been one of the big surprises the last year or so. It’s been amazingly resilient given the global backdrop. In fact I’d just flown in from Mars and you’d told me the global story and asked for a currency forecast, I probably would have said about 70 cents.

Now, the Aussie’s not immune to what is going on. We think it will drift from around $1.07 today down towards that parity level at the end of 2012.

AUD/USD: 100 c

GERARD MINACK, CHIEF ECONOMIST, MORGAN STANLEY: I think it’ll be around 90 cents. The key driver of the currency is really global growth and commodity prices.

There are some other things that play a role, but that’s the big picture thing that drives it. And I think we’re going to see slower global growth, commodity prices come off, so I think the risks are the currency goes down, not up this year.

AUD/USD: 90 c

TIM HARCOURT, ECONOMICS PROFESSOR, UNSW: I’m picking at $1.07, just above parity.

I think it’s principally a story of the power proximity because China and India, Indonesia are demanding Australia’s resources, and for that reason I think the dollar will be strong and the rest of our fundamentals are closely tied to the emerging markets, where again, that’s where most of global growth’s gonna come from.

AUD/USD: 107 c

ALAN OSTER, CHIEF ECONOMIST, NAB: Well we think the Australian dollar where commodity prices are currently around will be good value at around about $1.01.

So we have the Australian dollar by the end of the year around parity. I think it’ll bounce up and down a bit in terms of weakness in essentially the US dollar because of quantitative easing being offset a little bit by further falls in commodity prices as we go through.

AUD/USD: 101 c

SCOTT HASLEM, CHIEF ECONOMIST, UBS: We’re looking for the Australian dollar to be around $1.05 against the US dollar at the end of the year.

In the near term, with the RBA lowering the cash rate and some more weakness coming through in the global economy, we do think the Australian dollar could lose some of its recent strength, maybe even head down towards parity again.

But again, over the course of the year with the global economy stabilising, looking a little bit better and the Australian economy looking a little bit better, we do expect the strong fundamentals of China growth, demand for triple-A-rated debt, which Australia has, is all gonna help the Australian dollar remain reasonably high.

AUD/USD: 105 c

TICKY FULLERTON: So the good news for exporters and import-competing businesses is that three of our four experts see the dollar falling this year.

The bad news is: not by much. Tomorrow night our experts will be turning their attention to a key indicator of the health of the economy, and that’s unemployment.

———————————
December 2011
———————————
As we approach year-end 2011 the Australian dollar is hovering around parity. So armed with the clarity of hindsight we re-visit our selected analysts forecasts from back in May 2011, some of their predictions are doing better than others… So far Matthew Sherwood from Perpetual and Nigel Stapledon, UNSW are looking the most on the money correctly predicting an AUDUSD rate of around 99 cents. But given the volatility of the AUD this year, with a month to go any one of them may still be in with a chance.


Source for following predictions: Australian Financial Review May 7-8, 2011

Commonwealth Bank currency strategist Richard Grace says the local dollar will get to $US1.12 by September driven by the terms of trade boom, and by increasing interest from foreign investors in diversifying into currencies other than the greenback.

National Australia Bank John Kyriakopoulos is slightly more cautious. Although after its recent surge he upped his short term forecasts by as much as 4 cents, he believes the local dollar will fall to $US1.02 by year end. He says the currency appears expensive at $US 1.10, based on measures such as the terms of trade and the current account.

ANZ Bank says its official Australian dollar year-end forecast is $US1.03. It sees the currency at par with the greenback until at least July 2012 and says weakness in the US dollar is likely to persist owing to America’s low interest rates, large fiscal hole and ailing housing market.

JPMorgan economics team local currency year-end forecast of $1.04. It believes the underlying fundamentals appear strong, and the dollar will hold above parity until the end of 2012, when the US Federal Reserve is likely to begin raising interest rates.

Citibank analysts say the Australian Dollar is overvalued by about 6 per cent. they believe that while the currency may go higher in the short term, it is difficult to make the case to long-term investors for buying the dollar at present values.



Source for following predictions: ABC Lateline – Experts revisit AUD predictions, May 11 2011

Andrew Pease, Russell Investments We’re still fairly cautious about the outlook for the rest of the year and we do think it will end the year weaker, potentially below 90 cents.

And the reasons why we think that are the case by the end of this year, I think the markets will start to be looking at the timing of the first American rate rise, and also we think that commodity markets have probably run too hard and with China slowing we’ll see commodity markets come back quite a bit.

Nicki Hutley, KPMG We’ve already seen the ECB start to nudge up rates and sooner or later the Federal Reserve is going to have to get of its hands and do likewise. We are seeing quite pronounced recovery there and that will gather momentum and we all know the Fed is, if nothing else, very hawkish on inflation, so they will act.

And I think that will make a psychological change to the market, bring about that psychological change that will see a shift back down to 90 cents by the end of the year.

Besa Deda, St George Bank We’re looking for the Aussie dollar to finish the year at $1.02. That is a little bit lower than where it’s currently trading. The main reason is that we are forecasting slower growth in the Chinese economy and we do think that commodity prices will peak in the second quarter of this year. Also, interest rates in other major economies are starting to move higher or will start to move higher in 2012 and the currencies of those economies will start to price that in and that will pressure the Aussie dollar lower against these currencies.

Nigel Stapledon, UNI. OF NSW My feeling in the second half of the year is that the balance of news is – it’s a lot more even. I think there’s a fair probability that the news on the US will continue to get a little bit better, but it’s a little bit more problematic about China and the net balance of that could be slightly negative for the Aussie dollar. So, I’d be pretty comfortable with a forecast of around sort of 99 cents, a dollar.

Matthew Sherwood, Perpetual I continue to expect the Australian dollar will depreciate against the US down to around 99 US cents. And the reason for that is a very solid US recovery is brewing at the moment and core inflation in the US economy is clearly rising. And as a result, I tend to think that’s going to bring the US Federal Reserve out of its trenches earlier than market expectations.

Now, whilst being hawkish on the US Fed has not been a policy which has rewarded investors in the past six months or so, my suspicion is we’re seeing the clear signs of a very solid and sustainable recovery in the US, and because of that, the US dollar would be expected to rally.


Australia’s unemployment rate unexpectedly dropped in January, sending the dollar jumping as the chances of another interest rate cut receded further.
The country’s jobless rate eased to 5.1 per cent last month from 5.2 per cent in December. Analysts had tipped the rate would increase to 5.3 per cent.

The Australian dollar immediately rose more than a third of a US cent to $US1.073 in the wake of the figures. Investors viewed the likelihood of a rate cut in March at about a one-in-three chance prior to the ABS data, a ratio that’s likely to sink as they digest the better-than-expected job numbers.
“There’s very little likelihood of a rate decline in the immediate future without some big negative shock coming out of Europe,’’ said Citi’s Mr Williamson.

smh


The Reserve Bank’s surprise move to leave its key cash rate unchanged propelled the Australian dollar to record highs yesterday.

The dollar leapt to 82.38 euro cents against the euro zone currency and touched 68.3 pence, a 27-year high against the British currency. Within minutes of the RBA’s decision, the Aussie jumped almost a cent to US108.1¢. Last night it was trading at US107.99¢, up from US107.25¢ on Monday.

The Reserve Bank’s decision to hold rather than cut rates was interpreted to mean the RBA was more confident about the economy than many had anticipated.
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Australian borrowers will have to wait for at least another month for more interest rate relief after the Reserve Bank surprised pundits by leaving its key rate unchanged.

The Reserve Bank today kept its cash rate at 4.25 per cent, defying expectations of a third rate cut in a row.

The dollar rocketed on the news, jumping about one US cent to $US1.081 within minutes of the announcement.

“It’s a pretty big surprise,” said Market Economics managing director Stephen Koukoulas. “They were obviously very close to cutting interest rates and decided not to.”

“They put a huge amount of weight on what’s happening in the mining sector by the looks of this,” he said. “So we’ll see whether it’s mining versus the rest of the economy – who wins out?”
The central bank took heart from recent signs that the US economy is picking up growth and receding concerns about the European debt crisis.

“Recent data from the United States suggest a continuing moderate expansion after a soft patch in mid 2011,” RBA Governor Glenn Stevens said in a statement accompanying the decision. “Growth in China has moderated as was intended, but on most indicators remained quite robust through the second half of last year.”

The RBA’s decision may take the heat off the country’s major banks – at least for now. Several of the banks had indicated that they may not pass on another rate cut by the central bank because their own borrowing costs continue to rise.

Most economists had predicted the RBA would slice another 25 basis points off the cash rate today. The consensus may now focus on the central bank’s March meeting for that cut to take place.


The professional punters may be divided about which direction the Reserve Bank will jump today, but there are 107 good reasons why our central bank should cut interest rates again. All relate to the strength of the Aussie dollar. Let’s explore just a few of them.
Late last year, when our central bank began shaving interest rates, it was swayed by the potential for chaos on global markets and the need to soften monetary policy settings just in case the worst eventuated.

But it was a close call, particularly the December cut.

According to the minutes from its December 6 meeting, the domestic economy was chugging along nicely and our major trading partners were shipshape. On that basis, alone, it considered there was no need to cut rates of 4.5 per cent, which it considered just about right.

It cut them anyway, to 4.25 per cent, as the storm clouds gathered over Europe.

Many would argue now that there is less reason to cut rates again. In the two months since the last meeting, the perception is that the danger levels have receded. Wall Street has resumed its march northwards, to its highest level since 2008, employment in the US has just experienced its first solid jump in years, and the Europeans appear to be muddling through their debt crisis.

Despite the appearance of a more benign climate in the developed world, credit conditions on global markets remain tight. While there has been some easing in the past six weeks on European debt instruments, bond traders are far more nervous than their cousins in the equity markets.

If you need to bet on which is correct, it is always wise to opt for the guys in control of the money instead of those selling the stocks.

This morning, the debate is likely shift more to domestic factors, which have begun to overshadow global events, dominated by the strength of the local currency and the impact it is having on the economy.

With a once-in-a-generation resources boom in full swing and continued growth in China and our other Asian trading partners, the dollar can head only upwards.

The Aussie dollar will be stronger for longer. There is no doubt about that. And that strength will provide the mechanism to reshape the economy, squeezing investment out of industries that can no longer compete.
But there is good reason to believe it has been pushed to artificially inflated levels by the manipulation of both American and European central banks that have slashed their interest settings to just above zero in an effort to drive their currencies lower.

At 4.25 per cent, our interest rates are at a huge premium to almost every other developed nation. Throw in a triple-A credit rating, and the Aussie dollar – once considered the peso of the Pacific – suddenly has been transformed into Popeye. What not so long ago was among the world’s most volatile currencies suddenly has achieved safe haven status.

Everyone wants a slice of the action. And who can blame them? Borrow euro, buy Aussie. It’s a no brainer.

Add to the equation the fundamental reason our dollar is strong – the vast inflow of investment funds to build and expand resource projects coupled with record shipments of raw materials – and reining in the Aussie will be no easy task.

But narrowing that interest rate differential with Europe, the US – and by association China – and Japan, may go some way to achieving it.

The threat of inflation, which dominated discussion around the Reserve Bank boardroom last year, clearly has receded.

The most recent official figures showed an annual rate of 3.1 per cent for the December quarter. More importantly, underlying inflation – the RBA’s preferred measure – was sitting at about 2.6 per cent. That’s well within the 2 to 3 per cent targeted range.

Job creation also has stalled as the currency strength cut a swath through import-competing industries, forcing many to sack workers.

While the headline unemployment rate, at 5.2 per cent, was among the best in the developed world, job growth was the worst since the Bureau of Statistics began compiling the figures in 1992.

Add to that yesterday’s consumer spending numbers. Retail remains weak, so weak in fact that in the lead-up to Christmas, it contracted from even the paltry levels of December 2010.

Annual retail sales grew by just 2.4 per cent last year, down from a 2.5 per cent rise the previous year. That was the weakest growth rate in 27 years. And again, that record only exists because 1984 was the year the bureau began compiling the statistics.

If the Reserve Bank needs any further convincing, it will come this week as the half-yearly profit season cranks into gear. The universal thinking is that this year will be tough.


Although the Australian dollar had a great run coming into February, we expect the high-yielding currency to come under pressure next week as the Reserve Bank of Australia is expected to lower the benchmark interest rate from 4.25%. According to Credit Suisse overnight index swaps, investors are pricing a 79% chance for a 25bp rate cut, while market participants see borrowing costs falling by nearly 100bp over the next 12-months as the central bank tries to shield the $1T economy.

At the same time, 24 of the 27 economists polled by Bloomberg News expect to see the RBA lower the cash rate to 4.00%, but we may see central bank Governor Glenn Stevens talk up speculation for lower borrowing costs as the slowing recovery dampens the outlook for inflation. As the slowdown in global trade paired with the ongoing turmoil in the euro-area dampens the prospects for a more robust recovery, we expect the central bank to maintain a dovish tone for monetary policy, and Mr. Stevens may continue to strike a cautious outlook for the region as the central bank anticipates to see slow growth in China – Australian’s largest trading partner. In contrast, Australian Treasurer Wayne Swan argued that there is too much focus on the downside risks for the economy as he expects to region to withstand ‘the worst the world can throw at us.’ In turn, the encourage comments by Mr. Swan may lead the RBA to soften its dovish tone for monetary policy, but the central bank may show an greater willingness to cut borrowing costs further in order to stem the downside risks for the region.


There are signs a bigger fall is coming in the Aussie, says Westpac. Strategists at the firm see a constant flee of longer term investors out of the AUD, with long-term investors cutting AUD exposure by 38% from peak levels back in May. “The message from our client flows at the moment is that AUD strength is a fade,” says Westpac.

fxstreet.com


The Australian dollar has dipped below parity after more gloom about the euro zone debt crisis and disappointing local consumer confidence data. In early trade this morning the dollar fell as low as 99.80 US cents, down from $US1.0083 at 5pm on Tuesday. The dollar climbed back above parity before taking another turn down to 99.93 US cents after data showes local consumer confidence plunged in December despite two RBA rate cuts.

HiFX senior trader Stuart Ive said the local currency was being driven by generally pessimistic sentiment from the euro zone, despite some positive statements from the US central bank. “There was an article out on Reuters saying that Angela Merkel said she would not support any more funding for the European bailout fund,” Mr Ive said from Auckland. “The market reacted very quickly to that, and it influenced the euro and this flowed on to the Australian dollar.

“We also had the FOMC (Federal Open Market Committee) rates decision this morning, noting that the US economy had improved slightly, but that things remain very fluid, and they’re keeping a close eye on Europe – so there was no change in policy.”
Mr Ive said he expected the Australian dollar to remain low throughout the day.

“We’re getting close to levels with the Australian dollar and the euro that we might see some more active selling,” he said.
“The sentiment for these markets is still on the downside, even though there was some slightly better news with bond sales in Italy and Spain, they’ve not been reflected in the market.” Looking ahead, Mr Ive said he thought there could be some movement in the Australian dollar after a speech by Reserve Bank of Australia deputy governor Ric Battellino in Sydney at lunchtime.
“If he makes any statement about monetary policy in Australia, we would expect the market to move on that,” Mr Ive said.

AAP



The Australian dollar has opened higher on the possibility of developments on a eurozone debt crisis solution.

At 0700 AEDT on Tuesday, the Australian dollar was trading at 98.87 US cents, up from 98.57 US cents on Monday afternoon.

HiFX trading director Mike Hollows said the local currency had been pushed higher after a good night for international equities, on the back of varied bailout news in Europe.

“We saw European equities surge quite strongly, and that followed onto the US ones – the Dow’s currently up two and a half per cent,” he said.

“There were rumours that the IMF was potentially looking at structuring a 600-billion euro loan to Italy – that’s been denied, but it was certainly encouraging.

“Anything which gives us hope from a European perspective is going to be a huge positive, at least in the short term.”

After four weeks of declines, the Australian dollar was showing some signs of rallying, Mr Hollows said.

“There’s been a lot of negativity in recent weeks, and we’ve seen at least a short recovery,” he said.

“The Aussie did actually go up considerably higher (last night) than where it currently is – around the 99.75 level, so not far off parity.


The Australian dollar is headed for its fourth consecutive week of declines as Europe’s debt woes hit investor confidence.

National Australia Bank head of research Peter Jolly said the local currency was down more than three US cents in the week to Friday amid concerns Europe’s financial crisis will intensify.

“I think investors now fear what is around the corner,” he said.

“There is no quick end to Europe’s issues and as that drags on the negative global growth consequences continue to be priced.”

The Australian dollar has dropped around 10 US cents in the past four weeks.

At 1700 AEDT on Friday it was trading at 96.95 US cents, down from 97.09 cents on Thursday.

Mr Jolly said investors were having to weigh the relative strength of the Australian economy against a worrying global economic climate.

In the short term he expected the downward trend to continue, but said the release of several key pieces of economic data next week, including retail trade figures and building approvals, could arrest the decline.

If the figures are stronger than expected it may lower expectations the Reserve Bank of Australia will cut interest rates in December and increase demand for the local currency, he says.

“If we do see okay data next week and the RBA perhaps holds in December, which would be a surprise to pricing, that would support the currency.”

Read more at theAge


The Australian dollar fell today as a shockingly weak reading on China’s manufacturing activity dealt a further blow to risk sentiment, sending stocks and commodities reeling.

The Aussie dollar dropped to a fresh six-week trough at 97.56 US cents, extending losses for the month to over 7 per cent. It last traded at 97.68 US cents.

A very low reading of HSBC China PMI, which fell to a three-year low of 48.0 in November, from 51.0 the month before, added grief to an already soggy currency.

Australia is very sensitive to Chinese economic indicators as the Asian giant is its single largest export market and a major determinant of commodity prices.

“Markets fear that the global slowdown, in particular European woes spilling broadly into China and Asia, is starting to feed through,” said Su-Lin Ong, senior economist at RBC Capital Markets.

Earlier in the day, the currency had come under renewed pressure on talk of a possible rating downgrade for France after a media report cited Belgium and France were holding fresh talks about Dexia’s rescue plan.

Read more at the Sydney Morning Herald


The Australian dollar has dipped below parity with the US currency after another wild night on global markets.
The dollar was recently buying 99.85 US cents, down from 101.04 US cents, after US and European stocks sank on fears the debt crisis in the euro zone could spiral out of control after Spain and France paid a higher price at their debt auctions.
The dollar neared parity yesterday afternoon but as the session wore on it slowly recovered lost ground to close locally at 101.04 US cents. It’s the first time the dollar has sunk below parity since October 12. It has also lost ground against other currencies, sinking below 77 yen, 74.2 euro cents and 63.4 pence.

The Australian dollar is down 1.5 per cent against the greenback so far this week and is heading for its third consecutive weekly decline.

Risk exodus

FT Forex director of currency research Kathy Lien said there had been an exodus out of high-risk, high-yield currencies, like the Australian dollar in the past week.

“This weakness in the Aussie has all to do with the continued tensions in the euro zone,” Ms Lien said from New York.

“That’s based on concerns of the affect that Europe’s trouble will have on the world in general and the prospect of slower growth, not just in Europe or the US, but also in Australia as well.

“So, even though the outlook for Australia is better than any other country, the currency is suffering from global risk aversion.”

Ms Lien said there were rising concerns that euro zone government debt woes would spread beyond Greece, Ireland and Portugal.

“The main catalyst is that Italy could be forced to knock on the doors of France and Germany, and be the next country to ask for aid,” she said.

“There’s also a risk of the ratings agencies downgrading France and Italy.”
The Australian share market, meanwhile, is off about 0.9 per cent for the week and about 1 per cent for November – despite the volatility on overseas markets.

93 US cents

Toronto-based CIBC World Markets economist Andrew Grantham believes the Aussie was overdue for a fall, based on lower interest rate expectations and slightly slower growth from China.

Financial markets were this morning pricing in the equivalent of six 25 basis-point rate cuts over the next 12 months by the RBA. If such cuts eventuate, the RBA’s cash rate would be back down to 3.25 per cent by November 2012, barely above the lowest level reached during the global financial crisis in 2008-09.

“Ongoing concerns surrounding Europe and, potentially more relevant for Australia, the prospect of slower growth in China still point to short-term weakness for the Aussie dollar,” Mr Grantham said.

Read more: http://www.smh.com.au/business/markets/dollar-sinks-below-parity-as-debt-crisis-roils-markets-20111118-1nlqd.html#ixzz1e0r3soFR


The Australian dollar skidded today as a broadly weaker euro dragged risk assets lower, triggering a wave of stop-loss sales.
The dollar slumped more than 1 cent to $US1.0073 as heightened worries the euro zone’s debt crisis may engulf France sapped risk appetite. It last traded at $US1.0081, a 4.2 per cent loss so far this month and threatening recent lows at $US1.0051.
Stocks across Asia-Pacific veered into the red while regional credit markets turned cautious as spreads on the iTraxx Asia investment grade index jumped 17.5 basis points to a one-month high of 206.67.

“The Shanghai equity market was the real catalyst… Stops were triggered,” said David Scutt, a trader at Arab Bank Australia. The Shanghai market was down 1.7 per cent.

“People are incredibly nervous about Spanish and Italian bond yields… We need a bazooka that will stop the contagion or we’ll got to a tipping point real soon.”

http://www.smh.com.au/business/markets/dollar-skids-back-towards-parity-20111116-1nhro.html


The Australian dollar surged to three-month highs on the yen today after Japan intervened aggressively to weaken its currency, but skidded against a broadly stronger US dollar.

The market also continued to count down to the Reserve Bank of Australia's (RBA) policy meeting tomorrow, which might see the first cut in rates in two-and-a-half years.

At the local close, the Aussie was up at 83.61 yen, having leapt more than 3 percent to a peak of 83.90 when Japan entered the market to buy US dollars for yen. That set the Aussie on course for its biggest monthly rally since 1995 with a rise of 12 per cent, a dramatic reversal from September when it slumped 9 per cent.