TH: Australian dollar jumps as US debt fears hit greenback
THE Australian dollar reached its highest point since early May today as growing concern about America's financial position hurt the greenback.
The currency got a further boost as the governor of Australia's central bank, Glenn Stevens, in an afternoon speech said Australians shouldn't be too concerned about slowing Australian household consumption, noting he was optimistic about the country's prospects.
Richard Grace, chief currency strategist at Commonwealth Bank of Australia, said Mr Stevens's comments and tone are among the reasons he expects the Australian dollar will continue to track higher.
"The governor's view on the Australian economy and its implication for Australian term interest rate pricing is one of those supporting reasons" to expect further near-term upside, said Mr Grace, who is targeted a move to $US1.1200.
The Australian dollar was recently at $US1.0917, up from $US1.0821 late yesterday. Against the Japanese yen, the Australian dollar was at Y85.23, up from Y84.91.
Outside of Mr Stevens's speech, the focus throughout markets was on comments from Barack Obama, who said a US default could lead to a "deep economic crisis", and called for a bipartisan compromise in the next few days. Shortly thereafter, House Speaker John Boehner accused the US President of creating a "crisis atmosphere" and predicted his plan will pass both chambers and be signed into law. Coupled together, the comments did little to reassure markets.
Tony Morriss, senior interest rate strategist at ANZ, said the stronger Australian dollar, flight-to-quality and heightened economic uncertainty following the US developments should support Australian bonds in higher ranges.
"There is scope for the (Australia to US 10-year bond spread) to head towards 2010 lows near 170 basis points," said Mr Morriss.
Late Tuesday, that spread stood at 192 basis points.
Looking to Australia's bonds and its currency for the rest of the week, tomorrow's report on second-quarter consumer inflation is likely to drive both markets for the rest of the week. High inflation would likely mean more policy tightening by the Reserve Bank of Australia in coming weeks, a realisation that could lift the Australian dollar and hit bond prices.
