Currency View
??? Australian Dollar Bull Run Just Starting
Having been bullish the Australian dollar for a long time, and getting the favoured upside break through 80 cents, it is appropriate to reassess our targets.
The target for this year has always been 86 cents, with parity, $1.00 achievable in 2008/2009.
The 86 cent target is clearly on the horizon even earlier than I had anticipated, and may well be achieved in 2-6 weeks. It is entirely possible for the AUD to strike 89 cents by the end of 2007, and that is my new end of year target. The target for 2008 is now 96 cents, with parity likely to occur late 2008 to early 2009.
FxMax Forecasts
Q2 2007: 86 cents
Year end 2007: 89 cents
12 months from now, April 2008: 93 cents
Year End 2008: 96 cents
H1 2009: $1.00
The bullish reasoning remains the same. While a lot of people have been focused on the carry trade argument of late, and it is a significant factor in the recent sharp run up, the underlying powerful combination of a currency with one of the highest interest rate settings in the western world, and also a major commodity producer on the doorstep of Asia, is irresistible. Especially, when all of this overlays an environment of a weakening US dollar.
The following is quoted from my Australian dollar report of 7 December 2006, and the arguments as expected remain on course.
???The US dollar is in the midst of a long term cyclical decline. With that now confirmed by the recent sharp drop of the US dollar, global fund managers and investors would prefer to place funds in non-US locations, or at the least diversify further from the US dollar. As these institutions survey the horizon for alternative currency based investments one of the more attractive and to some degree safe haven islands is the Australian dollar.
The Australian dollar continues to ride two very powerful waves that are likely to last all of next year and beyond. 1. The high yield provided by the RBA is money for jam coming as it does packaged with sophisticated and liquid financial markets. Global investors can enjoy a good yield with liquidity. 2. The commodity boom continues unabated.
The expectation here has always been that the commodity boom will run for 5 to 15 years, and more probably the later. To be sure volatility will remain a significant part of the sustained rally in commodity prices, but overall the trend will remain higher. The commodity boom is driven by global growth and global growth is increasingly less dependent on US growth. Expect intra regional trade in South America, Asia, and Europe to accelerate this year driving global growth to higher levels despite a soft landing slow down in the US.
The attractiveness of a high yield earning major commodity producer on the doorstep of Asia should not be under-estimated.???
The Australian dollar has had a strong run of late and while a correction might normally be expected, it seems a large number of market participants are awaiting a pullback to buy. Often in such circumstances the pullback never eventuates and the market accelerates to the upside as more and more people are forced to chase the market rather than wait for it to come to them.
The most probable place for some form of medium term top is in the .8600 to .8650 area, but this should be viewed as just a bus stop if you like on the journey to still higher levels. For now the market remains immediately bullish as increasingly global investors recognize that even against the US dollar the AUD has a yield, even carry, advantage, and especially so if that US dollar keeps falling as it looks like it will.
We should remember that the Australian dollar is the dollar that lost a dollar, from 1.49 in 1971 to .48 just a few years back. It is now on the rebound as the US dollar experiences a long term price shift lower in a global economy that is no longer as US centric as it once was.
The weak US dollar is the window of opportunity for the Australian dollar??™s strength. Australia??™s high yield, and commodity producing proximity to the Asian economic boom are the drivers, with or without the Yen carry booster rocket.
The chart below shows how after 3 years of consolidation the Australian dollar is again headed higher on a similar trajectory to that of the 2000 2003 rally. Parity is achievable in 2008/2009.