Aussie’s hot August run

IT WAS no change yesterday for the Reserve Bank of Australia, which agreed to keep the cost of borrowing on hold at 4.5 per cent for the third consecutive month. This signalled continued stabilisation in the Australian economy, which is good news for its first female prime minister Julia Gillard. The decision to hold rates did not take the markets by surprise, which had widely expected the outcome, but the Australian dollar nonetheless slipped 0.2 per cent against the US dollar and hit US$0.9071.

After sliding against the buck in April and May this year, the Aussie dollar has since started to recover on the back of stronger risk appetite and positive global economic growth figures. Therefore, IG Index’s David Jones said that even after its latest rally, the Australian dollar still has ample upward momentum behind it over the next few weeks.

But FX analysts expect the currency pair to initially pull back to the US$0.90 level in the next few days before rising to US$0.93 over the next month or so. Jones adds: “The Australian dollar looks strong right now and is one to watch in the next few weeks as we could see further gains.” However, historical data suggests that any upside is likely to be capped at US$0.94 – so it would not be worth buying at this level and currency traders should only buy the Aussie on dips.

But what about the prospects for the Aussie in the longer-term? Australia’s strong mining and commodity industries have kept the economy strong. However, the country (and its currency) is largely dependent on its exports of raw materials to emerging markets and especially to China due to its geographical proximity. A slowdown there would have a negative impact on Aussie dollar strength because emerging countries’ demand for raw materials such as base metals will fall.

If the US dollar strengthens and Chinese growth slows, then Michael Hewson at CMC Markets thinks that the Australian dollar could potentially fall over the next 12 to 18 months to the US$0.88 level. However, any fall is unlikely to be caused by domestic factors since the economy is expected to remain relatively strong. For example, Capital Economics’ Sukhi Ubhi argues: “Consumer spending will probably just stay on a weaker track, rather than slump.”

The Aussie dollar is expected to continue to fluctuate but it should benefit from world economic growth, ongoing commodity demand and relatively high interest rates, making it a fairly safe long-term buy.

But it will be the next few weeks that should be the most interesting ones for the Aussie dollar and for FX traders.