The Aussie Dollar vs. the Greenback

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– If the two biggest Australian banks can’t agree on the direction of the Australian dollar versus the US dollar over the next twelve months, what chance does it give the average punter?  The reality is that trying to predict the performance of a currency is reasonably difficult (understatement?) given the amount of information needed in order to compile a forecast.

– But that doesn’t stop the intrepid currency analysts and strategists.  Fair play to them, they are prepared to stick their head ever so slightly on the chopping block, ready for the axe to fall.  Fortunately for them they can qualify their opinion based on all the information that they have to hand at that point in time.

– Typically, within hours of the release of such a piece of research, some other item of data will be released from somewhere that gives them the opportunity to re-evaluate their position.  Plus, the markets tend to have a short memory anyway, so even if they make a complete hash of it, no-one will remember in a few days anyway.

– So, as reported by Bloomberg News, the Commonwealth Bank (ASX:CBA)  and National Australia Bank (ASX:NAB) have issued their annual forecast, with both “banks disagree on the outlook for the nation’s currency this year.”

– Quoting from a research by Commonwealth Bank, Richard Grace their senior currency strategist said, “Support for the Australian dollar from a commodity price perspective is expected to continue.  The currency tends to outperform in an environment of strong global growth.”

– Apparently, Grace had predicted last May that the Aussie dollar would end 2006 at USD$0.79.  It didn’t say whether that was his first or last prediction on the currency during the year, or whether he has had several stabs at it during the last twelve months.

– While NAB’s John Kyriakopoulos said, “We don’t expect the economy to be positive for the Australian dollar in 2007, in contrast to 2006” and therefore he doesn’t expect it to burst through the USD$0.80 barrier.  When we start looking at currencies, it’s only a short trip from there to interest rates, and on that subject Kyriakopoulos says, “We don’t expect the RBA will be raising interest rates again this cycle.”

– Just as it is important in financial markets for there to be a differing of opinion, it is also important that someone is prepared to risk splinters by sitting on the fence.  In this case the fence sitter is State Street Global Advisors head of currency in Sydney, Chris Loong.  He told Bloomberg, “I can understand the banks’ variable outlooks.  Demand for commodities may be positive for the Australian dollar but, depending on how the US travels, we could see a growth slowdown and that could put a lid on it.”

– He went on to say, “At this stage we’re cautious about the Australian dollar breaking significantly above 80 cents.  We’re cautious about how slower global growth in 2007 will impact growth currencies such as the Australian dollar.”

– Overnight the Australian dollar fell back from the brink of 80 cents following the release of a US manufacturing survey which showed factory manufacturing had expanded in December.

– Grange Securities research director Stephen Roberts commented to Reuters, “The Australian dollar is likely to base near these levels before making an assault on 80 cents… However, it is worth keeping in mind that virtually all of the US economic readings released since December 12 have been on the stronger side of expectations.”

– Although the Aussie dollar has been going gangbusters since the start of the year, the same can’t be said for the All Ordinaries, and especially the resources companies.  BHP Billiton (ASX: BHP) and Rio Tinto (ASX:RIO) opening down by over 3% this morning, does that represent a good buying opportunity?

Kris Sayce
Kris Sayce, dubbed the ‘Jeremy Clarkson of Australian finance’, began as a London finance broker specialising in small-cap stock analysis on London’s Alternative Investment Market (AIM). Kris then spent several years at one of Australia's leading wealth management firms. A fully accredited advisor in shares, options, warrants and foreign-exchange investments, Kris was instrumental in helping to establish the Australian version of the Daily Reckoning e-newsletter in 2005. He is currently the Publisher, Investment Director and Editor in Chief of Australia's most outspoken financial news service — Money Morning.
Kris Sayce

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