Currency Update

Sunday, April 27 2014

Since late January the A$ has risen from 86c per US$ to around 94c. While this has been good for the oversees traveller, it is not so good for the competitive position of the Australian economy—particularly manufacturing, tourism and agriculture. These are segments we would like to see picking up to offset the declining resources segment.

There are a few reasons the A$ has strengthened including:

  • Market positioning—at the start of 2014 many investors were selling A$ and by late January just about everyone had. The market was heavily short A$ by that time.
  • Commodity prices have stopped falling. Iron ore touched US$105 a tonne in early March but has rallied back to US$117. New supply is still expected to drive iron ore prices lower over the next two year.
  • In late January the market was expecting a small chance of another RBA interest rate cut by the end of 2014 and it now expects some chance of a hike. A strong labour report helped in this regard although we think the economy remains a little fragile and it is too early to be lifting rates.

In summary, several small positive factors have combined with a “short” A$ market to push A$ higher recently. Longer term we see the unwinding of the resource capex cycle and a recovering developed world economy to result in the currency settling between 80–85c.

 

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