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october 2008 the outlook for the australian dollar meanwhile is not so rosy the 425 basis points in cumulative rate cuts that the royal bank of australia rba effected over the last year have lowered the interest rate differential with other industrialized countries while the rba has indicated that it will pause before cutting rates further interest rate futures reflect the expectation that rates will be lower twelve months from now economists say the rba is open to cutting interest rates again if consumer and business confidence appear threatened but for now it is content to let monetary and fiscal stimulus measures take hold to be sure the uptick in risk tolerance has been good for the australian dollar igniting a 25 rise since march the currency now stands at a 7 month high against the us dollar but the increasingly modest differential is now causing some analysts to question whether it is a reasonable risk to take especially against the backdrop of volatility and a high correlation with global stock prices what s the point of picking up a 3 percent interest rate differential by being long aussie and short japan in a world where the exchange rate can move by that much in two days asks one analyst rhetorically this same analyst is actually recommending investors to use the australian dollar as a funding currency and go long on higher yielding currencies such as the brazilian real this particular trade would have netted a respectable 5 9 return in 2009 how quickly the roles have reversed posted by adam kritzer in australian dollar economic indicators news 1 comment australian new zealand currencies benefit from risk aversion may 6th 2009 against each other the new zealand kiwi and australian dollar have traded in a pretty tight range for the last year except for a blip in the fall of 2008 this makes sense as both currencies rise and fall in accordance with exports and interest rates against other currencies meanwhile both have torn upwards in the last couple months despite steep interest rate cuts both currencies have maintained their interest rate advantages against other industrialized currencies this has not gone unnoticed and the return of the carry trade has been kind the current improvement in sentiment is providing an underpinning of support and while that remains the case and that may be until midyear the new zealand dollar is going to remain well supported said one economist the correlation between the new zealand kiwi specifically with the us stock market has become remarkably cut and dried of late which you can see from the chart below for carry traders therefore it probably makes more sense to follow stock market commentary than to track new zealand economic data the same economist for example warned that the equities rally which has seen the broad u s standard poor s 500 index climb 36 from its march low after rising another 3 4 monday to its highest since jan 8 may be dissipating besides given the deteriorating economics in both countries lower interest rates are probably inevitable we think this case for further cuts will be made in the second half of this year we think it will be very difficult no matter what the global economy is doing for the rba to ignore rapidly rising unemployment offered one analyst who predicted that rates would be cut to a trough of 2 in such a scenario the interest rate spread would still remain healthy but perhaps not enough to offset the additional risk australian home prices are falling at a rapid clip the labor market is sagging in new zealand meanwhile a decline in sentiment and consumer spending has corresponded with a 1 contraction in gdp in the quarter ended march 31 tourism is down although net exports are increasing the current account deficit continues to expand but this is mostly a product of an investment balance perhaps related to the carry trade for now forex traders remain optimistic albeit slightly less so than before the difference in the number of wagers by hedge funds and other large speculators on an advance in the australian dollar compared with those on a drop so called net longs was 16 692 on april 28 compared with net longs of 17 250 a week earlier posted by adam kritzer in australian dollar investing trading 1 comment australian dollar rises despite unwinding of carry trade apr 21st 2009 when two weeks ago the royal bank of australia rba cut interest rates one would have expected the australian dollar to suffer proportionately instead the currency continued its steady upward rise and touched a six month high before falling back slightly one surprised analyst lamented these types of inconsistencies can make trading forex difficult or down right frustrating at times the interest rate cut marked the sixth since september since which point the rba has trimmed its benchmark lending rate by 425 basis points leaving it at 3 see chart below courtesy of the fundamental analyst traders have reacted to the successive declines in yield and simultaneous pickup in risk aversion by unwinding carry trades many of which had been long the australian dollar the massive sell off that ensued left the aussie a long way below the level of parity with the usd which only last year many analysts had viewed as inevitable the most recent rate cut in contrast was greeted positively by traders perhaps because they were expecting a larger 50 basis point rate cut but more likely because their priorities had changed a pickup in risk aversion in recent weeks has definitely reinvigorated interest in comparatively risky currencies such as the australian dollar overall the markets remain risk averse and investors are increasingly making bets in accordance with economic fundamentals rather than yield levels the focus will remain on the global backdrop risk appetite is still fragile and the market is increasingly realizing that the recent recovery was excessive in the case of the australian dollar traders were heartened by the rba s decision to lower interest rates to a 49 year low since it reflected the bank s commitment to dealing with the economic crisis but at this point the australian economy is still in poor shape prime minister kevin rudd said yesterday for the first time that a recession in australia is inevitable amid a slump in global growth that is eroding demand for natural resources from the world s biggest shipper of coal and iron ore meanwhile the global economic downturn has pushed australia s economy into its first recession since 1991 reserve bank of australia governor glen stevens said according to the minutes from the rba s last meeting conditions in the labor market continued to soften and further falls in employment and rises in unemployment were expected these observations should be viewed in the context of a 5 7 unemployment rate the near term prognosis for the australian economy remains quite poor regardless of whether a recovery materializes in 2010 as forecast by economists accordingly analysts expect the rba to lower its benchmark interest rate further probably to 2 25 or 2 5 there is a bias toward further modest rate cuts although we continue to think that the rba may well pause for a few months to assess the impact of the current round of fiscal stimulus offered one forecaster given the lull in market activity some commentators have turned to technical analysis westpac currency strategist robert rennie said their own risk measurement models are clearly flagging a bumpy period ahead for high yielding currencies our proprietary models are clearly telling us to watch risk sentiment and data much more closely than we have over the past six weeks in short traders should not become complacent as result of the aussie s recent rally and should continue to monitor economic data for signs of progress and or hiccups on the road to recovery posted by adam kritzer in australian dollar central banks 1 comment swiss franc in spotlight jan 29th 2009 the swiss franc is in the same boat as the us dollar and japanese yen benefiting from an increase in risk aversion and an unwinding of carry trade positions in other words the currency rising on the back of the sound monetary policy of the national bank of switzerland with its low rate of inflation and proportionately low interest rate despite the fact that the swiss economy is poised to contract in 2009 its economy is in better shape than its rivals and its current account balance is still in surplus as a result the consensus among analysts is that investors will continue to flock to the franc as switzerland is sill perceived as a relatively low risk place to invest especially compared to the euro which has risen against the dollar of late the swiss franc remains undervalued bloomberg news reports investors are drawn to the franc in times of international tension and economic upheaval because of the country s history of neutrality and political stability read more there s nothing swiss can do to stop franc s rise posted by adam kritzer in australian dollar economic indicators major currencies swiss franc no comments nzd aud down in 2009 jan 9th 2009 while the australian dollar and new zealand kiwi technically started 2009 in the black most analysts believe that both currencies will continue their record declines that began in 2008 all economic indicators continue to point downward due to the adverse conditions created by the worldwide recession the economies of australia and new zealand are extremely dependent on exports of raw materials and dairy products respectively unfortunately due to a contraction in demand and a decline in speculation the prices for both types of commodities appears unlikely to erase even a fraction of the losses suffered last year the death blow into the heart of both currencies will likely be delivered by their respective central banks which are expected to make additional interest rate cuts this will further erode the rate differential with the us japan that previously signaled the currencies as attractive investments bloomberg news reports the average forecast is for the currency aud to reach a low of 62 cents in the first quarter before recovering to 66 cents by the end of 2009 new zealand s dollar will bottom at 52 u s cents in the second quarter and recover to 55 cents by the end of the year read more australian new zealand dollars complete worst year on record posted by adam kritzer in australian dollar economic indicators 4 comments aud continues to dive dec 8th 2008 on the basis of technical factors the australian dollar had halted its precipitous decline against most major currencies as a result of an unbelievable 100 basis point interest rate cut however the currency has resumed its fall that the rally was short lived is not a mystery the yield advantage enjoyed by australia over the last few years has almost completely evaporated combined with lackluster australian equity performance and tanking commodity prices foreign investors have little reason to maintain capital in australian holdings on the plus side the rate cut showed investors how serious australian economic policy makers are in dealing with the credit crisis unfortunately diligence doesn t always translate into efficacy read more dollar back under pressure posted by adam kritzer in australian dollar no comments credit crisis pummels australian dollar oct 29th 2008 the australian dollar has lost nearly 1 3 of its value relative to the usd over the last few months as the credit crisis continues to drive investors away from areas perceived as risky in other words the best and perhaps the only reasonable explanation for its fall has very little to do with australian economic fundamentals then again the rise in the currency that took place over the last decade was also rooted in technical and financial trends although rising commodity prices were also a factor the australian dollar as well as the new zealand kiwi was one of the prime beneficiaries of carry trades due to unusually generous interest rate levels now that investors are chasing stability capital preservation instead of yield however the currency has seriously fallen out of favor the australian reports equity markets would continue to drive currency markets while being influenced by the ongoing financial crisis these are unprecedented times in volatility for the australian dollar and currencies said one analyst read more dollar crashes to five year low posted by adam kritzer in australian dollar no comments sa rand latest victim of credit crisis oct 7th 2008 over the last two months the south african rand has plummeted losing nearly 20 of its value against the us dollar en route to a five year low it seems the currency has become the latest victim of the credit crisis and the resulting widespread risk aversion the sudden exodus away from the carry trade for example has affected the rand disproportionately as many foreign investors had come to south africa over the last few years to take advantage of the country s 12 interest rate now the country is facing a horrible crisis and is worrying about its ability to finance its current account deficit which already exceeds 7 of gdp accordingly analysts predict the rand will continue to drop bloomberg news reports the portfolio flows we have seen over the past couple of years are going to dry up and we will not be able to fund the deficit with the portfolio flows the rand may slide to 9 20 rand by the end of the year read more south african rand declines to six year low on credit turmoil posted by adam kritzer in australian dollar emerging currencies politics policy no comments bank of australia lowers rates sep 17th 2008 it would seem as if the world is conspiring against the australian dollar in the last couple months the currency has plummeted nearly 20 from the 25 year high it had reached against the us dollar a combination of global economic weakness falling commodity prices and a trend towards risk aversion have turned the tables in favor of currencies perceived as more stable in times of crisis to add insult to injury the central bank of australia decided to cut its benchmark lending rate narrowing the interest rate differential that had been partially responsible for the australian dollar s multi year appreciation bloomberg news reports in the near term the question will be do we hold here or go down a bit more on interest rates said central bank governor glenn stevens read more australia s consumer sentiment gains for second month posted by adam kritzer in australian dollar central banks no comments australia new zealand to lower rates aug 29th 2008 i won t lie the forex blog is admittedly dollar centric in that developments in forex markets are usually assessed relative to their projected impact on the us dollar sometimes we forget that their are other currency pairs that move irrespective of the dollar take the australian dollar and new zealand kiwi for example as both currencies are backed by high interest rates th...