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e biggest since april 2009 after all the aussie s appreciation in 2009 was the highest in 15 years perhaps it s only natural that all else being equal it should fall a bit in 2010 posted by adam kritzer in australian dollar canadian dollar news 1 comment australia hikes rates how about the carry trade mar 14th 2010 following up on my last post i want to use this post to write about the long side of the carry trade specifically the australian dollar the bank of international settlements bis observed in a recent report that the role of short term interest rate differentials in both the deprecations and their reversal has grown over time when you consider that the benchmark interest rate in australia is now 4 and that interest rates in every other industrialized country including japan are close to 0 it s not hard to connect the dots earlier this month the reserve bank of australia rba raised the benchmark by 25 for the fourth time since it began tightening in an accompanying press release the rba stated that the board judges that with growth likely to be close to trend and inflation close to target over the coming year it is appropriate for interest rates to be closer to average today s decision is a further step in that process it s worth noting that the australian dollar barely budged because investors had expected the move the larger question was and still is the ultimate extent of rba rate hikes and how soon it will get there glen stevens governor of the rba has himself indicated that rates are still 50 to 100 basis points or hundredths of a percentage point below normal if you do that math that means that the rba will hike rates to 4 5 5 before stopping other more bullish analysts think 5 6 is a more realistic expectation because it is closer to the long term average of australian rate hikes as to when the benchmark will reach that point it s anyone s guess going forward analysts have pegged the liklihood of an april rate hike at 40 said one analyst it s now a line ball call indeed if you put a gun to my head i d guess that the rba is going to hike again by 25 basis points in april still most think that the rba won t hike again until may added another analyst they are not indicating any urgency we think they will go again in a couple of months it could be three months it could be two our formal view is two that may depend on how the inflation numbers look it s too early to project when the next next after the next one hike will take place because it depends on the timing of the first one at this point most australian economic data is trending steadily in the right direction australia s economy is starting a new upswing unemployment fell to 5 3 in january not far above levels considered full employment for the economy a rebound in construction and an investment splurge in the mining sector are expected to restore growth in the economy back to historic averages by the end of 2010 the rba has indicated it expects inflation to remain within its 2 3 target band without drilling too deeply into any of the other numbers there s very little reason to doubt that the australian economic recovery is genuine which reinforces the notion that it is only a question of when not if the rba further hikes rates in fact the picture surrounding the australian dollar is almost a mirror image of the japanese yen while the yen looks destined to fall irrespective of the carry trade the australian dollar looks destined to fall while further monetary easing in japan will give the yen a second life as a funding currency higher rates in australia will once again make it a popular long currency in short with commodity prices likely to remain strong and the spread between australian and us interest rates likely to widen further its only a matter of time before the australian dollar breaches parity against the us dollar in fact the australian dollar just touched a 13 year high against the euro though that is as much due to the greek debt crisis and euro problems as it is with aussie strength meanwhile the australian dollar has zig zagged against the us dollar and is now in a rising trend following a recovery in risk sentiment whether it sustains this momentum depends largely on whether the rba hikes rates next month posted by adam kritzer in australian dollar news no comments pause in rate hikes threatens aud dec 29th 2009 in october the reserve bank of australia rba became the first industrialized central bank to raise interest rates it followed this up with two additional hikes in november and december bringing its benchmark rate to the current level of 3 75 by far the highest among major currencies this series of rate hikes caught forex markets completely off guard and investors moved quickly to price the changes into securities and exchange rates the australian dollar initially spiked more than 7 following the first rate hike bringing its total appreciation in 2009 to 32 enough to earn it the distinction as the second best performing currency after the brazilian real beginning in november however concerns began to build that perhaps traders had gotten ahead of themselves and the aud has been in freefall since then investors now fear that the rba may have acted too hastily in hiking rates so soon and so fast by its own admission the rba raised rates only after much deliberation the rate adjustment would not be intended to slow demand compared with the current forecast path but aimed simply at keeping the stance of policy appropriate for improving economic conditions according to its own minutes since the recession was ultimately so mild some would say non existent in australia however the rba ultimately decided that pre emptive rate hikes were in order now interest rates are back in the normal range according to a deputy governor from the rba in other words the current rate is perceived as neither promoting nor hindering aggregate demand which means it may not need to be tweaked much more in the near term in addition there is growing concern that further rate hikes could trigger a cycle of deleveraging because of the high debt burdens that plague australian households and businesses household debt already exceeds 100 of gdp which is even higher than in the us besides financial institutions are raising their own lending rates by wider margins than the benchmark rate hikes so there is less impetus for the rba to act further investors appear to have come to terms with this as futures markets now reflect a 45 probability of another interest rate hike at the next rba meeting in february this is down from 67 only last week if you re wondering whether the rba could be influenced by the lofty australian dollar when conducting monetary policy it s conceivable but not probable it has already acknowledged that the carry trade is generally back in vogue and specifically targeting its very own aussie but that as on earlier occasions the economy has proven to be resilient to these forex swings if it turns out that the markets truly overestimated the pace of recovery and by extension interest rate hikes in australia then the rba won t even have to worry about whether the economy can withstand further appreciation since the aud would probably remain fixed at current levels posted by adam kritzer in australian dollar central banks news no comments kiwi and aussie diverge then re unite nov 18th 2009 over the last few months the new zealand dollar and australian dollar have largely moved in tandem see chart below when the reserve bank of australia raised its benchmark interest rate earlier this month it shocked the markets and the aussie shot up while the kiwi remained fixed in place many observers predicted that such was the beginning of a divergence in the two currencies less than one week later however the new zealand dollar hitched itself back to the australian dollar and the two currencies have since traded in lockstep investors have long tended to view the currencies and economies of new zealand and australia as one both economies boast large export sectors and for much of the last decade high interest rates given that the carry trade has been and continues to be one of the largest forces in forex markets it makes sense that the kiwi and aussie would be grouped together both these superfical similarities mask substantive differences which have only become more accentuated as a result of the global economic crisis alan bollard governor of the bank of new zealand summarized this disparity as follows australia has avoided negative growth and its prospects are driven by strong terms of trade vast mineral deposits the chinese market and rapid population growth new zealand has had a recession and the pick up is slower and more vulnerable a difference financial markets do not appear to appreciate while both economies are currently experiencing negative trade imbalances new zealand s deficit was 5 9 at last count while australia s is closer to 2 given that australia s energy and commodity exports have surged by nearly 30 in the last few months while new zealand exports are stagnating this discrepancy could widen in the coming months investment is also surging in australia as the value of advanced resource projects those that are either committed or under construction jumped 41 to a record 112 46 billion australian dollars us 104 03 billion in the six months to the end of october and of course the most obvious point of differentiation is between the two economies respective benchmark interest rates thanks to the aforementioned rate hike australian rates stand at 3 5 exactly 1 higher than comparable new zealand rates many analysts point to australia s improving fundamentals higher rates positive gdp growth booming investment in the energy sector increasing exports as the basis for the strong appreciation in the australian dollar given that the new zealand dollar has kept pace with the australian dollar it is in fact the world s best performing major currency over the last six months this kind of analysis seems dubious if not completely irrelevant it should be clear to most observers that the carry trade is dominating activity in the forex markets carry traders relatively speaking are undiscriminating with the main factor of importance being interest rate differentials despite the fact that new zealand interest rates are only 2 5 higher than us rates and actually less than australian rates hardly enough to compensate investors for volatility risk the markets are awash in liquidity and investors are once again chasing yield wherever they can find it one analyst offered a frank summary of this phenomenon it s all about the carry trade the fed can t do anything certainly they can t raise rates and the market knows that and is exploiting it for the carry trade borrowing in u s dollars and the kiwi is a beneficiary of that that s the only game in town you can forget most economic data it s all about the fed given that australian rates are projected to rise faster and higher than new zealand rates beginning as soon as december 1 it s conceivable that the aussie will outpace the kiwi at the same time the fact that us interest rates will likely remain low for a while means that both currencies will continue to benefit in the short term posted by adam kritzer in australian dollar news no comments australian dollar rises remains closely correlated with stocks aug 24th 2009 the performance of the australian dollar over the last six months has been nothing short of incredible since the end of february the australian dollar has risen 29 against the u s currency and a still impressive 18 if you backtrack to january when the aussie was still in free fall as has been the trend in forex markets of late the currency s rise cannot be attributed to an improvement in fundamentals the economic picture remains nuanced that is putting a positive spin on it and definitive proof of recovery has yet to emerge we really are trawling pretty deep to try and get any snippet of information that might have some backhanded relevance as far as australia goes said one analyst as a result fundamental analysts have been forced to wait for a more precise picture about the timing of any reserve bank of australia interest rate hike on this front investors are ratcheting down their expectations of a rate hike anytime soon as the rba has signaled that there s a danger of raising rates too soon futures prices reflect the expectation that rates will rise by only 37 basis points from current levels before 2010 and by 161 basis points 12 months from now with such economic uncertainty investors have turned their attention elsewhere nomura chief economist stephen roberts said in the absence of any clues about the fundamental drivers of the currency nearly all the cues in foreign exchange markets are being taken from equities some analysts have posited a close relationship with the us stock market the correlation between the aussie dollar and u s equity market in particular has been very strong over the past few weeks with our analysis showing a correlation as high as 95 percent for other analysts the relationship is with the chinese stock market this correlation makes more sense logically since the australian economic recovery is largely contingent on continued growth in china and the concomitant purchases of australian commodities currency markets will be watching the shanghai share market which has been a pretty big influence on the aussie recently summarized one analyst a reporter for the wsj tried to spell it out even more clearly in an article entitled australian dollar up late closely tied to chinese stocks unfortunately the correlation with chinese stocks runs both ways when the chinese stock market tanks often for inexplicable reasons as it has for the last three weeks the australian dollar follows suit another analyst is more blunt the story for the australian dollar and other risk and growth oriented currencies is similar to the share markets they ve had a great run and are probably due a bit of a pullback posted by adam kritzer in australian dollar news 3 comments canadian dollar slated to outperform other commodity currencies jul 29th 2009 in the same vein as monday s and tuesday s posts covering the new zealand dollar and australian dollar respectively i d like to use today s post to look at another commodity currency the canadian dollar the loonie it turns out has also benefited from the a recovery in risk appetite and concomitant boom in commodity prices it has appreciated by 7 against the usd in the last month alone en route to a ten month high all in all with almost everything going its way these days besides the crummy weather and the impact on tourism a return trip to parity last visited nearly one year ago doesn t seem far fetched chimes one optimistic analyst like australia and new zealand canada s economic fate is tied closely to commodity prices simply as oil and other natural resource...
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