Business & Finance

Risks Remain for Australian Dollar

Source: Commonwealth Securities - June 3rd, 2001

A BRIEF HISTORY

In the month of April 2001, the Australian dollar was the strongest of the major global currencies against the US dollar. But over the month of May, the Australian dollar waxed and waned, largely holding between US51-53 cents. From end-April to end-May, the Australian dollar fell 1% against the US dollar.

Of 132 currencies monitored over 2001, the Australian dollar recorded the 33rd largest fall against the US greenback, dropping by 9.3%. The comparison of percentage charges across currencies has been calculated on the same basis - units of currencies per US dollar. The ranking includes the Euro legacy currencies (such as Deutschemark). The Australian dollar began 2001 at AUD 1.8050 per USD (US55.4 cents) and currently stands at USD 1.9728 per USD (US50.60 cents) . The currency rankings are useful in showing the performance of the Australian dollar against a common base, that being the US dollar.

In the first two months of 2001, only 9 of 132 currencies have appreciated against the US dollar. This highlights the significant strength of the greenback, especially given that only 7 currencies rose against the US dollar over year 2000. Major currencies have generally softened against the US dollar since the start of the year including euro (-9.9%), Swiss franc (-9.7%), New Zealand dollar (-7.8%), pound sterling (-4.5%) and Japanese yen (-3.8%).

AUSTRALIAN DOLLAR OUTLOOK

World-wide, analysts have been surprised at the resilience of the US dollar. Despite a weaker economy, rising current account deficit and the bursting of the technology bubble, global fund managers have remained enamoured to the US dollar. Unless fund managers change their focus, currencies such as the Australian dollar and Euro will continue to be stuck at levels that are considered fundamentally under-valued.

The central view expressed by Commonwealth Securities' Chief Economist Craig James is for the Australian dollar to grind higher over the second half of 2001, reaching levels around US56 cents by year end. For most of the next six months, economists expect the Australian dollar to remain cocooned in the current US50-55 cent range but cannot rule out short-term tests below US50 cents. Appreciation of the Aussie dollar in the medium-term is based on expectation of firm recovery of the Australian economy, and that stronger US and, in turn, global growth fuels higher commodity prices.

While there is a firm basis for this medium-term outlook on the Aussie, this is no 'rose coloured glasses' view. It cannot yet be said with certainty that the lows for the Australian dollar have been seen. There are substantial short-term risks for the Australian dollar including weaker commodity prices and the deteriorating political and economic environment in Asia. The Australian dollar is seen as a 'commodity currency' and a key gauge of commodity prices, CRB futures, is at 13 month lows. In terms of Asia, political tensions have increased in a number of countries, and economic conditions remain soft. Global fund managers are likely to favour an under-weighting of Asia in the current environment. The Australian dollar also continues to hug the coat-tails of the euro and sentiment remains negative on the European currency.