NEWS / Foreign Exchange

Euro finding support 1.3300 1.3250

Currency View

??? Bernanke is no Greenspan
??? Euro finding support 1.3300 1.3250
??? Australian dollar power formation

The key point about today??™s Fx markets is the relatively little bounce the US dollar has had on the back of Chairman Bernanke??™s comments. The reason of course is that the market believes the US economy has some significant vulnerabilities right now, yet the Chairman appears to be wanting to paint over them and pretend all is fine, and is more focussed on inflation, read an excuse to hike. Certainly he wants to be flexible and is watching the economy, but he has gone out of his way in his speech yesterday to declare that his bias is still to hike.

Such remarks coming on the back of the sub-prime crisis, which he wishes to dismiss as a nonissue, and so soon after a rather significant equity market sell off, suggests a lack of sensitivity in the role as Chairman of the Federal Reserve. I do believe that if equity markets again began to crash the Chairman would be willing to cut rates, but there is cause for caution in this belief. Chairman Bernanke seems to be operating from two personal perspectives, his modus operandi if you like which overlay the core responsibilities of his job. They are, a distinct desire to distance and differentiate himself from Chairman Greenspan, and, an almost salesman type approach to his role in the sense that he is there to reassure the youngsters out there that all is well, and his rate settings are perfect for on-going economic growth. Both these attitudes which I believe can be detected in his comments may stem from some insecurity, but the signal now going out to the market is that Chairman Bernanke, while having strong economic credentials, may not have the necessary savvy economic acumen to juggle and read contemporary real time economic evolutions successfully. The scary prospect then arises of a Chairman stubbornly holding rates up, while the economy quietly crumbles, thereby creating the potential for significant price dislocation in US, if not global, equity markets.

This possible scenario will increasingly sink into the perceptions of the market in general, and ???caution??? rather than ???greed??? will begin to dominate. Chairman Bernanke needs to quickly display some real world current economic savvy and insights to reassure global fund managers, or the recent equity markets highs, could have been just that for several months, even years.

For the US dollar, any apprehension about the thorough and complete ability of the Chairman of the Federal Reserve to be effective, overlaying the deficits and political gridlock now in place, this could be disastrous. The US dollar is in the midst of a multi year decline, a long term price adjustment largely powered by a global economy becoming far less US centric and more regional in asset and investment allocation. The US dollar is going down, probably to Euro 1.45 this or next year, and perhaps Euro 1.85 in a few years from now. If the scenario of further US economic softness with a stubborn Chairman on rates t the helm were to unfold, then this would act as a catalyst for a significant acceleration in the rate of fall of the US dollar this year.

It is already clear that Bernanke is no Greenspan, the question is, just how large is the gap?

The Euro has pulled back again from that approach to the 1.3400/10 resistance. There is room for further correction to 1.3250, but tend to think the very immediate 1.3300 level has a chance of containing this bout of downward pressure for a resumption of the major up-trend. The short term target of the next up wave is 1.3650, though 1.3900 could be achieved more quickly than most people expect.

The Australian dollar price action suggests a very high level of potential energy is building for another sharp and powerful up wave. The chart below shows a reasonably orderly climb to the 81 cent level, which has been followed by what is by the Australian dollar??™s own standards, a particularly tight low volatility consolidation phase over the last several days. This price action ???look??? often leads to an unusually sharp and powerful move.

The fundamental backdrop to the AUD remains extremely favourable. Asian and global growth rates could well accelerate rather than moderate from current levels, regardless of the US slow down. As long as the US economic consolidation phase remains one of a ???soft??? landing, despite duration, the rest of the world will do just nicely thank you. The demand for Australian commodities will continue to increase, the drought is moderating a little for the moment, and so exports could pick up significantly over the rest of 2007. On top of this of course is the ultimate carrot which is the high yield the Australian dollar offers global investors. While some caution developed as the Yen carry trade began to be unwound, the market has gradually picked up on our view that in a falling US dollar environment with strong Asian growth continuing, the Australian dollar is a very attractive proposition, yield and commodity producer on the doorstep of Asia.

The forecasts remains the same then for the AUD, short term objective 82 cents, by year end 86 cents, and in 2008/2009 parity with the US dollar $1.00.

Short term it is possible the AUD could dip at first to 80 cents or even .7950, but suggest the more immediate support level at .8035 may well contain for a rather powerful move to the upside over the next few days. 82 cents may well still be achieved this week, or perhaps next.