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Forex
US dollar collapse to catapult Australian dollar
October 29, 2007
Clifford Bennett, Chief Economist, Sonray Capital Markets
The USD is at the edge of a very steep collapse. The Australian dollar is well positioned to capitalize with a sharp one week rally to 92 cents, perhaps 93 cents, a distinct possibility. Clifford Bennett reports
The US dollar story is unchanged, but the patience of large global portfolio managers is about to wear out. While many suggest, even some Fed Presidents, that the US dollar decline to current levels is inexplicable, one only has to glance at a 30 year chart of a USD index to see that the mighty dollar has in fact visited these sorts of levels several times before. Unlike previous occasions when the US dollar was arguably over-sold on a fundamental basis, I suggest this time the US dollar is actually still over valued at current levels.
What is the value of a currency which:
1. Is in the process of being relegated form first position to equal first with the Euro, and perhaps even second slot behind the Euro.
2. Has a domestic economy starting to tip toward a hard landing scenario.
3. Massive deficits which may perhaps only be rectified by a much lower currency value.
4. Political paralysis until the next Presidential election.
5. A central bank having to cut rates aggressively, expect 50 points.
The 30 year charts show two things:
1. The USD is near low levels that it has seen several times before. This time however it is going to break through to new lows, to the deep blue depths below. For the Euro, the new reserve currency for the world, this means clear blue skies, and the market will be forced to chase it.
2. The AUD has plenty of room to move higher, and the USD fall to historic fresh lows will be the catalyst for the AUD to rally quite sharply.
The AUD could be catapulted at any moment to 92 even 93 cents, perhaps within the next week. This is a historic long term re-valuing of the US dollar, and every market that is gauged against it, including commodities and the Australian dollar. When you add the "high yield" and "doorstep of Asia commodity producer" tags, the Australian dollar becomes an irresistible long term portfolio allocation target.
This is why our 2-3 year forecast for the AUD is 1.0800 to the US dollar with risk to 1.1200.
On the day the AUD is immediately bid while .9010 holds and aggressively so above .9070. Even immediate minor support at .9100 which may be an exporter finally panicking, may hold for a sharp run at 92 even 93 cents next week.
USD Index 30 year
Source: Bloomberg
AUD/USD 30 year
Source: Bloomberg
Key Forecasts:
- Fed will cut by 25 to 50 points at the very next meeting.
- US economy will flirt with negative growth for 2 or 3 quarters.
- US equity markets remain at risk having broken back below 14,010.
- China to remain a powerhouse.
- Global economy to remain firm.
- Commodities volatile but bullish, and will remain in high demand.
- Gold still targeting US$800 to US$1,100, as per the pre 500 forecast.
- US dollar will have an accelerated collapse within 6 months.
- Carry trade is old news and over, the USD/YEN decline to be savage.
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- Australian dollar will continue to climb, 93 cents, then parity $1.00.
- Reserve Bank of Australia to hike by 25 points at next meeting.
- Global equity markets may make fresh lows beyond the recent collapse points before a sustained recovery, though this medium term risk is now greatly diminished.
- Australian equities are increasingly aligned to strong global growth.
Clifford Bennett, Chief Economist, Sonray Capital Markets.
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Shares: Going global: investing in international shares
Stocks: Stock picks for the long haul: GWA International Ltd (GWT) and Tabcorp Holdings Ltd (TAH)
Markets: Measuring the strength of the Australian sharemarket
Smart investing: How hot performance can deliver bad results
Forex: US dollar collapse to catapult Australian dollar
Stocks: Media stocks to watch
Stock of the week: TFS Corporation
Resident trader: Essential tips for beginner traders
Commodities: An underperforming silver has ramifications for gold
Expert panel (CFDs): Market neutral (pairs trading) explained
Expert panel (forex): a popular short-term strategy for traders
Disclaimer: This recommendation has been issued on the basis that it is only for the information and exclusive use of the particular person to whom it is provided by Sonray Capital Markets Pty Ltd ABN 18 104 482 993, AFSL 231151. These recommendations are current as at the date of issue. Past performance is no guarantee or reliable indication of future results. Trading in derivatives may involve a high degree of risk and significant loss, and is appropriate only for persons who can assume risk of loss in excess of funds deposited. This recommendation is of the nature of general information only and must not in any way be construed or relied upon as legal, financial or professional advice. No consideration has been given or will be given to the individual investment objectives, financial situation or needs of any particular person. The decision to invest or trade and the method selected is a personal decision and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of any investment for your circumstances. Although the information in this recommendation has been obtained from sources considered and believed to be both reliable and accurate no responsibility is accepted for any opinion expressed or for any error or omission that may have occurred herein.
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