Australian Dollar Recovers, Relief Seen as Temporary
The Australian dollar is in the process of recovering from a six year low hit this week, but any recovery is expected to ultimately be temporary.
The Aussie dollar remains in the midst of a storm, holding near six-year lows against the US dollar as it continued to sing the China blues.
The outlook for the Aussie has taken a marked turn for the worst, as troubles in China risk intensifying headwinds on Australia’s export-driven economy.
And once the turmoil in China subsides, it should shine a bright spotlight on the Fed which is expected to raise interest rates this year which would narrow Australia’s yield advantage.
Against the British pound the Australian currency fell sharply allowing the GBP-AUD to surge to its best exchange rate since 2009 at 2.2198.
Yes, there has been some relief in the form of a Chinese rate hike since, but we can't but help feel this currency remains vulnerable.
Sean Callow, Westpac Senior Currency Strategist, speculates that the AUD has “finally reached a tipping point and was likely to keep heading down”.
Callow continues, “There's no magic bullet for halting this sell-off because we've probably reached the stage where the fear takes over and feeds on itself.”
Callow does not believe the bottom has been reached for the AUD. While Westpac maintains its position of 0.7100 to 0.7000 by the end of 2015, there is still plenty of room for a more significant fall.
Latest Pound / Australian Dollar Exchange Rates
  | Live: 2.014▼ -0.11%12 Month Best:2.1645 |
*Your Bank's Retail Rate
| 1.9455 - 1.9536 |
**Independent Specialist | 1.9858 - 1.9939 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
Recently, Robert Rennie, Global Head of Market Strategy at Westpac, gave seven reasons why the AUD has not fallen to predicted levels in the near term.
The AUD has enjoyed trading between 0.7300 to 0.7500 despite negative sentiment towards it and current market forces that should weigh it.
In that report, Rennie argued that these factors supporting the AUD were merely artificial and an AUD fall is imminent, that it was only a matter of time.
He appears to have been correct.
Sean Callow agrees with this opinion and he states, “We've all been wondering how much bad news about the global currency the Aussie could absorb. So today's slump has been a long time coming, especially now the markets in the most trouble are among Australia's key trading partners.”
Widespread panic is fuelled by China’s equities problems and this is reverberated across South Korea, Japan, India, Indonesia and Singapore.
Callow says, “There is a great deal of stress and fear in the global markets and that's bad news for the Aussie, which tends to outperform in good times and underperform in bad times.”
But as the American market self corrected, the AUD rebounded too, trading 0.7197 by the end of day on Tuesday.
China stock markets continued to fall but other key trading partners for Australia, such as Japan and South Korea, experienced more stable markets that aided the AUD.
Additionally, the AUD was also supported by a rallying ASX, which jumped by as much as 3 per cent.
Nonetheless, global contractions and global pressure on commodity prices will only weigh on the AUD and the currency will continue to decline as the Chinese market remained volatile and unstable.
China Cuts Rates, Provides Relief
China has stabilised the commodity dollar family by cutting rates.
The steps were in line with our view that the authorities will keep adding stimulus to keep growth on track to reach the 2015 target of 7%.
The PBoC’s policy statement also confirmed this.
It adopted a more dovish tone, stressing the need to use monetary policy tools more flexibly.
"Overall, we expect more monetary easing to come. We also expect the authorities to allow more CNY weakness and to add more targeted (fiscal) stimulus, for instance by providing policy banks with additional resources to finance infrastructure spending," says Arjen van Dijkhuizen.
For the Australian dollar then the near-term outlook rests with action in China.
But the bigger picture remains that this is not an economy heading in the direction required to sustain a strengthening AUD.
Indeed, August data shows 'construction work done' confounded market and our own expectations for a decline, rising 1.6% in the June quarter.
This followed four consecutive quarters of decline.
Building work weakened in the quarter, as expected, falling 2.6%.
Engineering construction, however, rose 5.6% in the June quarter, the first rise in seven quarters. This was driven by a large increase in private engineering construction in WA in the quarter.
