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Tiger21Invest

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The underlying sentiment is for risky assets. With rates higher in Australia, investors are already interested in a carry trade with Aussie dollars, but with the nation’s four largest banks posting combined after tax profits of A$8.6 billion in the latest half year, there are additional fundamentals supporting the thesis. Australian banks are stronger than most areas really underpinning the desire for risk in their currency. Long Aussie.
 
I think the Australian government will be one of the first to increase interest rates supporting additional strength in the Aussie dollar. Budget figures are coming in better than expected as tax receipts are improved and traders are now even expecting a 50bps increase in rates by December. Adding fuel to this, central bank Governor Glen Stevens said yesterday that, “Australian interest rates will have to move off their current usually low levels.”
 
The Aussie dollar was up against all 16 major currencies as retail sales climbed 0.9% in August after having dropped by the same amount in July, beating estimates of 0.5%. I consider this to be a very strong result and shows the continued strength in Australia. It touched a 13-month high of .8819 during intraday trading and I expect continued strength.
 
Aussie dollar gained 9% vs. the USD this quarter. With the solid fundamentals now being reported in Australia, it makes sense for the Reserve bank to start withdrawing its easing policies. The growth picture is quite positive and investors expect the overnight cash rate to be raised by 25bps sooner rather than later. Governor Stevens stated this week, “interest rates can be expected, at some point, to move off their current unusually low levels.” Long the Aussie dollar.
 
Australia unexpectedly raised interest rates, the first G20 nation to do so since the recession began, demonstrating its faith that the Australian economy has successfully turned the corner. The Aussie dollar rallied against all 16 of the most traded currencies. Continue to buy Aussie dollars.
 
With inflation contained in Australia at 1.5%, well below the 2-3% target, it appears a little odd that the Australian bank decided to increase interest rates so soon, but apparently the 8% increase in home prices this year was cause for concern. I would continue to be long the Aussie dollar on expectation for continued asset price increases and interest rate increases while the US will continue to maintain its interest rates at the current low levels.
 
Australia reported an unexpected gain in unemployment furthering speculation that Australia’s central bank will continue to increase interest rates. The number of people employed rose by 40,600 last month from August 2008, as economists expected a decline of 10,000. The unemployment rate fell to 5.7% from 5.8%.
 
Australia has maintained its economy through strong trade with China as it exports commodities such as iron ore and coal to fuel China’s demand that it has generated through its stimulus package. But it could be dangerous for Australia to depend too much on China as a large part of the demand was in restocking inventories. Now Australia is trying to decide when it should take away its stimulus and how quickly it will tighten monetary policy, but I am also monitoring growth and trade with China as an important factor for future economic stability and growth in Australia.
 
Consumer prices were up more in Q3 than they were in Q2 and beat analyst estimates with a 1% advance since the last quarter vs. expectations of 0.9%. This will most likely increase pressure on central bank Governor Glenn Stevens to continue to increase rates. At the same time that prices are increasing in Australia, they are falling in other advanced economies making it more likely that other countries will not be forced to increase interest rates in the near future. I see the Aussie dollar as a good pair vs most currencies. The central bank last week reported that keeping the rate at very low levels may be imprudent. Futures show that investors are 100% certain that rates will another quarter point on Nov 3 and there is a 16% chance that rates will rise by half a percent.
 
Some interesting comparison points, the Australian dollar:
• is up 45% against the USD since March 2
• is the best-performing currency among the 16 most traded over the past 12 months
• reached a 14-month high against the USD on Oct 21 of 93.29 US cents
• has had 3 stretches over 90 US cents in as many years
• averaged ~70 US cents over the past decade
• reached 94.01 in November 2007
• peaked at 98.50 on July 15, 2008, the strongest since it began trading freely in 1983
RBS forecasts the currency will reach 97 US cents in the first quarter of next year. It currently is trading around 90.4. Philip Lowe, assistant governor of the Reserve Bank of Australia, warned Oct 19 that Australia “will have a higher average exchange rate” now than it has had in previous decades as a result of a high return on capital.
 
Goldman Sachs came out today with a report stating that investors should buy the Aussie dollar against the US dollar up to 95 US cents. They say to cover at 87.50 US cents. “With the robust GDP numbers out of the US, we think the backdrop could be supportive for risky assets in general in the short term.” The Aussie dollar was up today to 91.68 US cents.
 
Expect AUD central bank to raise interest rates on the next meeting... the central bank follows the 3 month T Bill, which lately increased the gap between the t-bill yield and the rate from Central bank, so they should raise interest rates either this tuesday or December.
 
Australian Treasurer Wayne Swan said on ABC television that it is too early to take away government stimulus as jobs and the economic recovery depend upon it.
 
The Aussie is down today as investors are taking gains due to concerns that the appreciation has been to rapid. It reached the 14-day relative strength index reading of 63.1 yesterday, near the 70 threshhold that signals that the currency is poised to weaken.
 
China said that industrial production and retails were up in October and as a result the Aussie was up being that China is Australia's largest trading partner.
 
Australia's PM spoke in Singapore today with many headlines: unemployment rate is still too high, consumer confidence is strong, Australian economy has strong fundamentals, Australia has benefited from China and Asian growth, monetary policy is still expansionary, stimulus is timely, temporary and targeted.
 
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