Strewth – Aussie dollar strength set to continue

ESCAPING EUROZONE CONTAGION
Despite the turmoil in the European Club-Med economies, where five year CDS rates and 10-year bond yields are on an upward trajectory, Australian credit markets have remained largely unaffected, and local bond issuance is solid. As James Hughes, senior market analyst for Alpari, points out, Australia has a strong balance sheet, comparatively low debt and strong growth projections over the medium term. According to Richard Grace, chief forex strategist at the Commonwealth Bank of Australia: “Despite the sovereign debt concerns in the Eurozone, and the subsequent bout of risk aversion which applied a mild amount of downward pressure to equity markets, commodity prices and global bond yields, the Aussie dollar has not traded below $1.0390 since it first traded above that level in early April 2011.”

ANTIPODEAN HAVEN
Yesterday, the Reserve Bank of Australia (RBA) announced that it would be holding interest rates at 4.75 per cent. According to Tim Waterer, senior FX dealer at CMC Markets Australia, this gives the Aussie dollar a significant yield advantage over the greenback and other major currencies: “With the euro and dollar hampered by their respective debt issues, traders looking for alternative investments to the ‘big two’ have found solace in the high-yielding Australian dollar.” As a result, for traders seeking higher-yielding currencies, the Aussie dollar sits atop the list.

COMMODITY GAINS
At the same time as being largely insulated from Eurozone and US woes, Australia continues to benefit from strong commodity demand from Asian economies (see chart, above). According to Mark Thompson, senior commercial dealer for Global Reach Partners: “Australia’s economy centres on its exports of iron ore, thermal coal and coking coal. All of these have been in high demand for building construction, infrastructure creation and energy consumption in China, India and Brazil over the past decade.”

NO ONE-TRICK PONY
With Australian reliance upon the Chinese growth story, some could see their fortunes as being inextricably linked. “We remain bullish on the Aussie dollar, due to the higher inflation pressures now feeding through into the Australian economy,” says Philip Lawson, portfolio manager for Adrian Lee. “We see the only dangers to continued Aussie strength being an unexpected fall in Chinese growth or an escalation in debt problems in the USA and Europe that would cause another financial crisis.”

But in the view of some, including Peter Baum, director of Glendevon King Asset Management, though a Chinese dip would hit the Aussie economy, it wouldn’t necessarily stop it dead in its tracks. According to Baum: “Irrespective that the Chinese economy may slow – such an important factor for the Australian currency – the rate of growth will in our opinion be sufficiently high to keep the Australian economy robust for the medium term.”