From battler to belter: $A grooves in paradigm shift

Australia has become a rare example of a relatively safe place to stash cash, helping the $A’s rise.
Photo: Rebecca Hallas

by
Jason Murphy

Currency strategists of the 1990s would be out of business now.

The $A has been above parity for 88 per cent of trading days since the start of 2011, despite savage cuts that have left interest rates at record lows.

It has been worth more than the $US since June 2012 – the longest such period since its float – despite weakness in the iron ore price. And it has stayed high in recent days even as the gold price dropped like a stone.

Old theories about currency drivers thrown out

Old theories about what moves the dollar have been thrown out, says Australia and New Zealand Banking Group currency strategist
Andrew Salter
. A timely example is the federal budget.

“It used to be very important," he said.

“It now bears no impact on the currency . . . it used to be that announcements at budget time implied big changes to fiscal policy. Nowadays big changes are flagged ahead of time and markets have chances to adjust to any new policy that is going to impact at the macro level."

He said the currency was now much more influenced by the concept of sovereign credit-worthiness.

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“We would never have imagined in the 1980s and the 1990s that a hard money institution like the Swiss National Bank would want to invest in $A, but guess what,? Last year it invested a substantial amount of its reserve portfolio in the Aussie."

Russia and Thailand are also among countries that have been selling $US and euros and looking to diversify into other currencies.

The theory is that as one of only a few countries with a triple-A stable rating from all major ratings agencies, Australia has become a rare example of a relatively safe place to stash cash.

Australia’s yield – 10-year government bonds are paying 3.26 per cent – is very attractive when compared to the US yield of 1.68 per cent.

Aussie dollar a ‘zombie currency’

In the past, movements in the official interest rate were tightly correlated with exchange rates, but as the Reserve Bank has cut official interest rates from 4.25 per cent to 3 per cent the $A has remained steadfast above parity.

National Australia Bank currency strategists report that the dollar has shown so little movement that one frustrated client has begun to refer to the $A as a “zombie currency".

Currency strategists say that even after 25 basis point cuts to Australia’s official interest rate, the yield difference is still strong enough to keep the $A high.

Supply-side arguments have also risen in prominence. Economists say quantitative easing policies in the UK, US and Japan have created a tide of liquidity that is sloshing outwards and causing exchange rates in those countries to fall and those of their partners to rise.

The appreciation of the $A against the yen on the announcement of the recent boost to quantitative easing policy there illustrates the power of the policy. The dollar has risen from buying ¥97 to ¥101.

“The main driver of a weaker yen remains the collapse of Japan’s current account surplus," he said, and noted that Japan’s lower level of quantitative easing over recent years had not caused the yen to sink.

“Exchange rates are determined by a host of relative factors," Mr Grace said.

Analysts’ forecasts for the $A at year-end

ANZ predicts the dollar will hit $US1.05 by the end of 2013 before falling to $US1.01 by the end of 2014.

Commonwealth Bank predicts it will rise to just $US1.04 by the end of 2013.

Morgan Stanley predicts the $A will fall to $US1.01 by the end of 2013 and US85¢ by the end of 2014.

The currency was steady on Thursday at around $US1.03.

Expectations of interest rate strengthening rose as more detailed data was released on the labour market.

Hours worked fell to record lows of 31.8 hours per week on average. The chance of an interest rate cut as soon as May rose to 32 per cent, according to financial market pricing.