© Sean Callow
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The Aussie reached its 4-month high on the RBA's decision to keep its interest rate unchanged. Do you expect this trend enduring?
Currently the Aussie is very well supported on dips, particularly given there is such a divergence between the Australian monetary policy, which is firmly on-hold at the moment, and the prospects of looser monetary policy in the U.S. and Europe. It shows a support for the Aussie Dollar and for the Australian government bonds as well. We think the Aussie might be getting close to a bit of pull back perhaps, because it has had such a good run and it has been rallying for the last 7 -8 weeks, hence the Aussie Dollar is on a winning streak. However, it is difficult to say why there would be a sharp reversal near term.
How would you characterize the Aussie: as safe haven or rather riskier asset?
The key point I would make is that the Australian government bonds are safe haven: they are very much in demand, and they have been very resilient. I do not think the currency overall should be regarded as safe haven. After all the Aussie is hitting this 4-month high, at the same time the S&P 500 is hitting its highest level since early May. We are not in the risk-off environment that is causing a flight to safety. The Aussie Dollar is still strongly and positively correlated with the U.S. stock market, which is not the sign of the safe haven currency. Thus, the appeal for the Aussie is that it is a pro-growth currency, that is why it is benefiting from the rally in the U.S. equities. Since there is a perception that Europe is a reduced risk for the global economy right now, which is a positive sign, that is attracting the demand for the bonds. Thus, the Aussie does have the multiple assets in its appeal, but overall I still would not call the currency itself as safe haven.
What is your forecast for AUD/USD for the end of August and for the end of this year?
I think for the end of August the Aussie is due for a consolidation, and there would be a bit of pullback , after a very healthy run, due to bad news from the offshore as we do not think the China's economy will bottom just yet. That probably pulls the Aussie back towards about 1.04 area, but we would expect the Aussie to recover around the year end and to be back around 1.05-1.06. The risk to that forecast is probably to the upside, depending on whether the Fed does proceed with another round of quantitative easing. If it does, then we expect 1.07-1.08 area for the Aussie. If it does not, the Aussie will pull back perhaps to 1.02 area.