Fears of slowdown rattle dollar
August 12, 2008
By Jacob Saulwick and Clancy Yeates
http://www.smh.com.au
ONE month after it almost drew level with the US dollar, the Australian dollar has plunged about 10 per cent - and there are fears of further falls if Japanese investors start to dump the currency.
The dollar's fall is part of a broader shift in global currency markets. Analysts and investors are rapidly switching to the view that the US will not bear the brunt of its slowdown alone.
They are bracing for much weaker conditions in the rest of the developed world, and driving up the US dollar in response.
The Reserve Bank supported this view yesterday. In its quarterly statement, the central bank hinted again it will soon start cutting interest rates to boost the local economy.
It also shifted its tone on the outlook for growth in Australia's major trading partners, pointing to a small reduction in the rate of growth in China and India.
Last month, a cocktail of booming commodity prices, strong growth, and the crisis in the US financial system took the Australian dollar within a whisker of US dollar parity, hitting US98.49. But yesterday it dropped another US0.61c to US88.7c, taking its total fall to about 10 per cent.
The plunge mirrors a similarly steep drop in August last year. Unlike last year, however, this fall has not been driven by Japanese investors dumping the currency, the chief currency strategist at Westpac, Robert Rennie, said.
Small Japanese investors have developed a lucrative line speculating on foreign exchange. A favourite trade is to borrow in Japan, where interest rates are low, and invest in Australia and New Zealand, where rates - and returns - are relatively high.
Mr Rennie said he was "very concerned" a speculative bubble was emerging, with Japanese retail investors rapidly increasing their total stake in the two currencies to $US30 billion.
"This is not long-term investment. This is short-term speculation, and the numbers that we are talking about are very significant," he said.
If Japanese investors do start to dump the Australian dollar it could head even lower. But Mr Rennie said the dollar would find plenty of support if it dropped too low.
The head of foreign exchange strategy at the Tokyo branch of the Royal Bank of Scotland, Masafumi Yamamoto, agreed the Australian dollar was unlikely to fall too far. But it would come under pressure if commodity prices continued to fall.
In recent weeks, global crude oil prices have fallen 20 per cent since record highs above $US147 a barrel. Base metal prices are also at six-month lows, driven by fears Asian demand is cooling.
A senior currency strategist at the ANZ Bank, Tony Morriss, said a key trade on currency and commodity markets in the past year was to bet on rising commodity prices and a falling US dollar.
"Both of those positions would have paid handsomely, but that's clearly being unwound," he said.
Mr Morriss said the severity of the recent changes suggested a fundamental shift in market views, rather than a brief correction. "The speed of the move that we've seen in recent weeks … would suggest that we are at a turning point.
"All the things that were very supportive previously [for the Australian dollar] have turned out to be eroded."
http://www.smh.com.au
ONE month after it almost drew level with the US dollar, the Australian dollar has plunged about 10 per cent - and there are fears of further falls if Japanese investors start to dump the currency.
The dollar's fall is part of a broader shift in global currency markets. Analysts and investors are rapidly switching to the view that the US will not bear the brunt of its slowdown alone.
They are bracing for much weaker conditions in the rest of the developed world, and driving up the US dollar in response.
The Reserve Bank supported this view yesterday. In its quarterly statement, the central bank hinted again it will soon start cutting interest rates to boost the local economy.
It also shifted its tone on the outlook for growth in Australia's major trading partners, pointing to a small reduction in the rate of growth in China and India.
Last month, a cocktail of booming commodity prices, strong growth, and the crisis in the US financial system took the Australian dollar within a whisker of US dollar parity, hitting US98.49. But yesterday it dropped another US0.61c to US88.7c, taking its total fall to about 10 per cent.
The plunge mirrors a similarly steep drop in August last year. Unlike last year, however, this fall has not been driven by Japanese investors dumping the currency, the chief currency strategist at Westpac, Robert Rennie, said.
Small Japanese investors have developed a lucrative line speculating on foreign exchange. A favourite trade is to borrow in Japan, where interest rates are low, and invest in Australia and New Zealand, where rates - and returns - are relatively high.
Mr Rennie said he was "very concerned" a speculative bubble was emerging, with Japanese retail investors rapidly increasing their total stake in the two currencies to $US30 billion.
"This is not long-term investment. This is short-term speculation, and the numbers that we are talking about are very significant," he said.
If Japanese investors do start to dump the Australian dollar it could head even lower. But Mr Rennie said the dollar would find plenty of support if it dropped too low.
The head of foreign exchange strategy at the Tokyo branch of the Royal Bank of Scotland, Masafumi Yamamoto, agreed the Australian dollar was unlikely to fall too far. But it would come under pressure if commodity prices continued to fall.
In recent weeks, global crude oil prices have fallen 20 per cent since record highs above $US147 a barrel. Base metal prices are also at six-month lows, driven by fears Asian demand is cooling.
A senior currency strategist at the ANZ Bank, Tony Morriss, said a key trade on currency and commodity markets in the past year was to bet on rising commodity prices and a falling US dollar.
"Both of those positions would have paid handsomely, but that's clearly being unwound," he said.
Mr Morriss said the severity of the recent changes suggested a fundamental shift in market views, rather than a brief correction. "The speed of the move that we've seen in recent weeks … would suggest that we are at a turning point.
"All the things that were very supportive previously [for the Australian dollar] have turned out to be eroded."
