global rates cuts and the aussie dollar, page-4

Falling Aussie dollar a 'silver lining' for economy

The World Today - Wednesday, 8 October , 2008 12:23:00
Reporter: Simon Santow

TANYA NOLAN: Throughout the financial troubles the Australian dollar has been bouncing around like a cork on a stormy sea.

Guessing where it might end up is proving a very hard game, even for those paid to predict it.

Analysts say that while a falling Aussie dollar might upset importers and overseas travellers, there is a silver lining for the local economy.

Simon Santow reports.

SIMON SANTOW: Stephen Koukoulas has been watching the Australian currency fall from his vantage point in London, working as a strategist for TD Securities.

He told Radio National this morning, a lot of the drop in value is down to profit taking from overseas investors in the wake of big changes to Australian interest rates.

STEPHEN KOUKOULAS: Banks that have got liquid assets, that have made the money, they're selling them and taking their money back home, so for an investor based in Boston or Tokyo or Frankfurt or London, and if they've been holding Aussie dollar positions in the bond or the stock market, they're selling them, getting their cash, taking it home and that's just forced the dollar down quite massively in the last couple of weeks.

SIMON SANTOW: Steven Koukoulas is also convinced that lower global commodity prices are also driving the dollar down sharply. And he's not alone.

Rory Robertson is an interest rate strategist at Macquarie Bank in Sydney.

RORY ROBERTSON: The global economy is weakening dramatically and therefore there's been a big down trend in commodity prices and one of the reasons that the Australian dollar has been strong is that the commodity prices have been buoyant.

Now commodity prices are falling, global growth is decelerating and so the Australian dollar has been down shifting.

SIMON SANTOW: On top of that, says Rory Robertson, there's the human factor. No investor likes to miss out on what they think everyone else is enjoying.

That means trying to surf a very crowded wave.

RORY ROBERTSON: Financial markets, you know, often tend to behave as a herd, 10 minutes ago almost the herd was rushing into commodities and the herd was rushing away from the US dollar. And then the penny dropped that in fact the global economy was sinking so suddenly people are dumping commodities, they're dumping equities and they're dumping the Australian dollar and many other non-US dollar currencies and rushing in the other direction.

So the US dollar had been falling for about six and a bit years, from February 2002 until earlier this year; we had a big down shift in the US dollar to basically multi-decade lows where the US dollar was extremely cheap, and where all the other currencies were extremely over-valued.

The herd ran in one direction for six and a bit years, the penny dropped and now the herd is running in the other direction.

SIMON SANTOW: Stephen Walters is the chief economist at JP Morgan.

STEPHEN WALTERS: It's that combination of commodity price weakness, expectations of pretty significant interest rate cuts that have been delivered. And I think a final factor is also what we call a flight to quality; which is amid all this financial market turmoil and plunging business and consumer confidence, what you typically see is a lot of global investors pull back on their risk and that means going back into what are perceived safe haven investments.

Typically, for example, in low yielding assets in Japan, and also in the US bond market which is the most liquid and largest investment market in the world. So we've seen a lot of flows out of what we call peripheral currencies like Aussie dollar, Kiwi, out of South African currency and back into the US dollar.

SIMON SANTOW: So is this the end for the climbing Aussie dollar.

Steven Koukoulas isn't so sure the market's settled on its value just yet.

STEPHEN KOUKOULAS: The Australian economy is still, despite the problems that we've got, superior to that of the US, the Euro, to the UK, to Japan, to Canada, the list goes on, and yet we weakened even ten per cent against those currencies.

Look I think we're probably going to move back into the high 70s, or even we could see 80 cents again and that's probably fair value level for the Aussie dollar.

SIMON SANTOW: Macquarie Bank's Rory Robertson agrees the Australian economy is fundamentally sound and better off than many others.

Still, he's not necessarily predicting the same rebound for the currency.

RORY ROBERTSON: The Australian dollar is at its lifetime average, since the Australian dollar was floated in the early 1980s, the average against the US dollar has been pretty well 70 US cents.

Now that the Australian dollar is around its long-term average, I think everyone should be a bit more modest about, you know, anyone's ability to forecast that the next big move. It could be either way. I, you know, because it's come so far, so fast, there's probably a reasonable chance that it will bounce. Lots of people still see value in owning the Australian dollar at these levels.

However, if the global credit crunch keeps intensifying, the global panic continues, then there'll be some investors who had themselves set with the Australian dollars for the past several years who will be forced to dump their position, and that would put downward pressure on the currency.

TANYA NOLAN: Rory Robertson is an interest rate strategist with Macquarie Bank.

http://www.abc.net.au/worldtoday/content/2008/s2385274.htm