TH: Dollar surges on Wall Street rally and Asian confidence
THE Australian dollar surged yesterday, lifted by a rallying US stockmarket and follow-through gains for Asian equities.
At 5pm AEST, the currency was trading at US86.48c, up US1.38c on Tuesday's close, and it also rose against the Japanese yen. With risk tolerance and stocks improving around the globe, Australian bond prices fell on both ends of the curve.
Laying the groundwork for a second straight day of gains to start the shortened Australian trading week was a rise of more than 2 per cent for the S&P 500 in New York trading. In turn, that move led to gains in Japan, Australia, South Korea and several other Asian stock markets.
Gains for stocks, the euro and the Australian dollar were particularly notable as traders shook off a plunge in German investor sentiment, as measured by the ZEW index. Nearly all markets have felt significant pressure from eurozone-related weakness in the past few months, with market participants continuing to hold that region paramount to all others.
"The optimism out of Europe has been difficult to understand this week given (that) the market is now looking at some bad news and dismissing it," said BNP Paribas foreign exchange analyst Rob Ryan.
Mr Ryan said he expected a pullback in both the euro and the Australian dollar in the next couple of sessions as some of that recent buying appeared overdone, with selling likely around US86.6c, or if that breaks, US87.25c.
Still, he remained bullish on the Australian dollar, noting that it would "benefit as China is
not tightening, the US is not tightening and Europe is not tightening".
But Westpac currency strategist Jonathan Cavenagh was less convinced. "As long as that liquidity flows through, the Aussie will benefit whenever risk isn't under pressure," he said.
"This rally isn't sustainable and I think we're heading back to the low-to-mid 80s."
While the Australian dollar rallied, bond prices dropped, with the September three-year contract down seven ticks to 95.08 while the 10-year bond fell 7.5 ticks to 94.55.
UBS interest rate strategist Matthew Johnson said yesterday's decline, along with several other recent drops, represented a return to fundamentals in the bond market, although he advised investors to remain cautious.
"It's finally turned around as I think the market is pretty rich by any reasonable measure. But there's still a lot of uncertainty about whether the European issues have been contained," said Mr Johnson, who added his conviction was to play a flattening Australian yield curve.
