© Robert Rennie
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The performance of the Australian Dollar has been quiet strong and has been driven by two or three different factors. Obviously in the last three or four trading sessions we have seen various ECB members saying that something very significant is coming up this week. That has definitely strengthened the Australian Dollar. Earlier today we were trading the Aussie almost at 1.05 that is back to March level of this year. I think the expectations about the ECB, the FOMC and potentially the BOJ next week saying about additional quantitative easing developments are factors that are supporting the Australian Dollar and probably will continue to do so through this week. I think this is also a domestic perception that the potential for any further rate cuts has been put on-hold. Last week the RBA Governor Glenn Stevens made it fairly clear that he does not think that further domestic rate cuts here will be wanted unless there is a significant deterioration in offshore markets. Apparently, it is both the offshore and domestic issue. Certainly the performance of the Australian Dollar has been pretty strong and arguably remains likely to be so in the near term.
What is your longer term outlook for AUD/USD?
If we faced another round of QE this year, we would expect to see further weakness in the Australian Dollar. A lot depends on to what extent the ECB, the FOMC, the BOJ meet and beat the expectations. We think there is a potential for a disappointment. Draghi made it very clear last week that something significant was being developed. He said:" We will do whatever it takes to rescue the Euro and believe me it will be enough." I guess it will be more important - will it be enough for financial markets? We suspect that there would be a disappointment. We expect the third quarter to be a pure weakness in the Aussie with the currency weakening back towards the parity level. With extreme optimism that we have seen in the last couple of days in particular, probably the market is getting ahead itself. We also expect once we see the period of risk-on, then the AUD/USD will start weakening back towards the parity level.
What if Greece leaves Eurozone, what impact this event might have on the Aussie's performance?
My standpoint for such questions like that is whether it is possible for Greece to leave. There is nothing within the European constitution that would allow a country to leave Eurozone or to be ejected from the bloc. It would only be in an extremely confrontational environment that you could see Greece either leaving or being ejected from Eurozone. That would be a very negative event and we would see the Australian Dollar hit.
We have never expected that Europe would begin to tear itself apart from Greece. We have never been believers of the breakup and of Greece leaving or being ejected. If it happened, we would see it as an extremely negative event, Lehman's-like event, which would have a very significant impact on the global financial market. Currently the Australian Dollar is emerging as safe haven and EUR/AUD is heading towards the extreme lows. Any potential breakup of Europe would trigger the Australian Dollar to quickly lose that save haven status, and if anything risky occurred, we would certainly have the Aussie trading in the mid to low 0.90s potentially very quickly. It is in event, which we put extreme low probability on.