WSJ:Australian Dollar Holds High Ground Despite Global Slowdown
-- Speculative investors bet on further gains in the Australian dollar
-- Relatively high interest rates and the country's top debt rating keep the currency in demand
-- Some analysts warn the jump in positive bets could signal the end of gains
By Eva Szalay
Speculative investors are betting on further gains in the Australian dollar in a sharp turnaround from June, suggesting a vote of confidence from investors despite signs of a global economic slowdown, and even though the currency is trading close to record highs against the U.S. dollar.
The Australian dollar sank to its lowest point of the year--$0.9580 against the greenback--in June this year, dragged down by jitters over the euro zone. But the so-called Aussie has since rebounded by some 9% to trade above $1.05, with investors betting on more gains in the currency, despite mounting evidence that global economic growth is juddering to a halt.
This is high ground for the Australian unit, which has never traded above $1.1080, and the strength is unusual, given that the currency is highly sensitive to global trade in commodities--Australia's biggest export--and they are under pressure from signs of creaking economic and trade growth around the world.
Exports from Germany, Europe's largest economy, saw a 1.5% fall in July, causing analysts to expect economic growth to flatline in the second quarter. Japan, one of the world's largest exporters, published data Monday showing a paltry 1.4% rate of annual economic growth between April and June, down significantly from 5.5% in the previous quarter. Meanwhile, China's economy grew 7.6% in the second quarter compared with a year earlier, the slowest rate since the global financial crisis began.
But with Australian interest rates at record lows for major economies, and the country a member of the increasingly exclusive group of countries with triple-A-rated government debt, the Australian dollar seems to be ticking all the right boxes for investors hungry for returns and relative safety, keeping the currency buoyant.
"There is a global shortage of vehicles with high credit ratings and relatively attractive yield, and quite simply, the Aussie fits the bill," said Neil Mellor, a currency strategist at BNY Mellon in London, in a note to clients.
In addition to relatively high benchmark interest rates at 3.5%, the Aussie also benefits from the country's macroeconomic fundamentals. The Reserve Bank of Australia upped its growth forecast for this year last week and left its key interest rate untouched.
Reflecting the encouraging outlook for the currency, data from the Commodity Futures Trading Commission released Friday showed that positive bets placed on it by speculative investors, such as hedge funds, have risen to a 14-week high.
The CFTC figures don't capture the entire speculative community, but they are widely seen as a neat proxy for profit hunters as a whole.
Now, the jump in positive bets has caused some analysts to question whether the Aussie is close to peaking against the U.S. dollar, as sharp swings in bets tend to signal peaks and troughs in currency moves.
"I don't think that the Aussie is in a speculative bubble, but for those who do think so, [this] report will add fuel to the fire," said Greg Anderson, a currency strategist at Citigroup, in a research note.
Some are growing nervous that the currency's gains may be limited from here.
"Last week all the conditions were there for the currency to break through $1.06 but it ran out of steam despite the generally positive investor sentiment," said Kit Juckes, chief currency strategist at Societe Generale in London. "I think we will revisit $1 before we get to $1.10."
