NEWS / Foreign Exchange

US dollar, long term geopolitical shift lower

??? Australian dollar at possible point of no return
??? Australian dollar Day of reckoning could be 1 to 3 years way
??? US dollar, long term geopolitical shift lower

The Australian dollar is at an interesting juncture. Lingering yet again near 80 cents but not yet there, everyone is wondering if it can break higher, but then again some are keen to sell near the magical .8000 level.

The bullish factors for the Aussie dollar have been discussed at length previously, but in brief again are,

1. High yield by global standards
2. Commodity producer on the doorstep of Asia
3. Sophisticated well regulated financial markets
4. Firm economic performance
5. Politically stable with western legal system
6. Falling US dollar environment

The bearish factors are not so easy to find, except for one, it??™s the big one and the Achilles??™ heel of the Australian dollar.

1. Australian dollar buyers are predominantly speculators

The majority of buying of Australian dollars is being done by a range of speculators from private intra-day traders to the world??™s largest institutions and funds. What this means is that one day these buyers will have to sell, in order to realise any profits they may accumulate. In other words over time, the whole global investment community is gradually turning into a sea of potential Australian dollar sellers. Now I am not suggesting we are going to have a liquidity crisis any time yet, but one day it is a very real possibility. The day of reckoning for the Australian dollar, where all the speculators take profit and we return to core fundamental value, that will be just a few weeks after the US dollar finishes it??™s long term price adjustment.

The US dollar is falling due to a long term geopolitical shift from a US centric world, to a world of balanced economic power by regions other than the US. This means balanced portfolio allocations with Europe and China the big winners from here. The processes involved include the US current account and trade deficits, political stagnation between the White House and the Houses, military over extension, a normal bout of economic consolidation correction, and an end to rate hikes with a shift to rate cuts possible by year end.

The US dollar is likely to fall dramatically lower this year and next. The real end to the decline of the US dollar may be several years away, but for practical reasons, profit, this next phase of decline now looming towards us, will probably complete in the first quarter of 2008. Possibly as early as third quarter this year, but more probably quarter one 2008.

This is when the AUD may become quite vulnerable in a medium term sense, when the USD decline takes a big breath/correction, due to profit taking. In the meantime the big picture outlook for the Australian dollar remains decidedly bullish. Given the momentous back ground forces driving this Australian dollar bull run, the 80 cent level is perhaps a more a mirage, an illusion. Certainly given its developed fame, some large and small players will have sell orders just below 80 cents to make sure they do not miss the boat. Once that selling interest, in the .7980/90 area I would think is absorbed by steady buying interest, the market is likely to move very quickly indeed toward 81 then 82 cents.

Some of the Australian dollar up move will be driven by stop loss buy orders generated by short term speculators who sold ahead of 80 cents with the other institutional selling, and some of the buying is likely to be Australian exporters beginning to chase the market higher having waited for pullbacks of a degree that did not eventuate. The point is the move will be quick once through 80 cents, and no one who wants to sell is waiting to do so up there, they are all just below 80 cents, so above 80 is devoid of sellers. It is therefore possible that we may have a lack of liquidity on the upside, a fast move higher before anything else.

Targets remain,

Short term ; 82 cents
This year; 86 cents
2008/2009; $1.00 US