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Australian Dollar special report

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Australian Dollar special report

Thu, Jul 31 2008, 08:09 GMT
by Clifford Bennett

FxMax

The Australian dollar remains under pressure short or near term as the market starts to accept that the next move by the RBA will be to the downside.

Today’s retail sales data, down 1% for June, confirms our forecast drop in domestic demand.

The second half of 2008 is a high risk period for the domestic economy. Falling property values, a function of an over heated speculative market, threatens to push the domestic economy at least into the “recession we did not have to have”, helped by RBA rate hikes on top of fuel costs. Increasing numbers of market commentators are coming to our view that the RBA has raised rates too far. The inflation pressures in the economy are largely a global phenomenon, where a response with domestic rate increases only dampens demand, but not necessarily inflation. It is a different economy and the RBA needs to understand its only choice is between firm growth and weak growth. Inflation may no longer be within their influence to the same degree as was historically the case.

As the RBA has overdone the rate hikes it may now have to play catch up to a slowing economy as the Fed did. The only problem here is that the RBA may remain too focused on inflation data, without spending enough time looking out the window.

The RBA should cut rates by 50 points by January, but it remains to be seen if they will.

For the Australian dollar we may see further downward pressure as particularly short term speculators stay away until the direction of interest rates is more clear. The major medium term support is in this .9450 .9380 area, which is where I would have expected the AUD to commence yet another rally. Certainly today’s trade surplus is encouraging of our still bullish medium term outlook. As previously mentioned it remains possible for Australia to experience a severe down-turn in domestic demand while the currency continues to climb toward parity by year end.

For the moment though most participants in the Australian dollar market are likely to be fearful of the move toward rate cuts as has been seen in New Zealand. Of course even with 50 points of cuts by the RBA, and that would be the best we could hope for at this time, Australian interest rate levels remain high by world standards. Therefore while there is some selling pressure right now, for perhaps another few days, continuing high relative interest rates, and a move toward sustained trade surpluses, are likely to see the AUD begin to move higher again next week.

On the day .9410 .9470 and still heavy. Looking for a major low .9410 to .9380, but not in a hurry to pre-empt the low just yet.

Published on  Thu, Jul 31 2008, 08:13 GMT