Buck-seat driver brings Aussie in to land

If Six Flags Magic Mountain is the ultimate destination for roller-coasters, then the Australian dollar's wild week on currency markets would be a main attraction.

If Six Flags Magic Mountain is the ultimate destination for roller-coasters, then the Australian dollar's wild week on currency markets would be a main attraction.

It was a ride that went around the world, reportedly involving one of the world's most famous investors, George Soros, the Reserve Bank, unemployment figures in the US and Australia, and the printing of money in the US and Japan.

And it was a journey that saw what is sometimes described as one of the world's most overvalued currencies break out of the range it in which it was trading for almost a year.

The week started quietly, with the Australian dollar hovering around US103.15¢ at 5am on Monday.

But behind the scenes, the wheels were starting to turn.

In Hong Kong and Singapore, Mr Soros — or an organisation or individual with similarly deep pockets — was placing a $US1 billion gamble on a Reserve Bank cut to the cash rate the following day.

The rumour spread, and by midnight, the dollar experienced its first low of the week, falling half a cent to US102.50¢.

Back in Australia on Tuesday, investors were waking up to one of the most anticipated RBA board meetings in recent months.

Financial markets were eventually split between interest rates remaining at 3 per cent, or dropping to a half-a-century low of 2.75 per cent. The seconds ticked towards 2.30pm. The dollar remained just below US102.50¢.

Then three numbers flashed up on computer and TV screens everywhere: 2-7-5.

The dollar plunged. In the blink of an eye, it lost half a cent again, falling to a low of US101.78¢ before stabilising under US102¢.

The bet reportedly placed by Mr Soros, known as the "man who broke the Bank of England" when he shorted the British pound in 1992, had paid off.

Economists spoke about the RBA's weariness with the high Australian dollar, and how, rather than intervening directly to lower the currency, it had tried to shore up sectors squeezed by its strength while boosting others who were not as badly affected.

The bears were out in force. But the economy had a few surprises up its sleeve. As the Bureau of Statistics released its data at 11.30am on Thursday, the markets were again caught unawares.

Jobs figures were stronger than expected, the unemployment rate slipping 0.1 per cent to 5.5 per cent in April.

The dollar surged, returning to just above US102.4¢, the value it held ahead of the RBA's decision.

Yet it was not the local unemployment figures that were to have the final say on the dollar this week.

"If I'd told you yesterday morning that employment was going to print at 50,000 and that when you came in this morning [Friday], the Australian dollar would be 2¢ lower, you'd wanted to have me committed to an asylum," National Australia Bank currency strategist Ray Attrill said.

Midway through the trading session in New York on Thursday, the US dollar crashed through the significant psychological barrier of ¥100.

The relentless rallying of the greenback was enough to send the Australian dollar into a tailspin. Stop-loss orders were triggered as the currency slid past its own psychological barrier of US101.50¢, pushing the dollar even lower. It tested parity as it bottomed at US100.46¢. At 5pm Friday on Australia's east coast, it was only slightly higher at US100.63¢.

"The strength of the Australian dollar is really the flip side of the weakness of the US dollar," Mr Attrill said. Looking ahead, currency strategists expect the dollar to remain under pressure as the mining boom peaks, the Chinese economy maintains its weak outlook and the US economy recovers.

"Since 2011, when the currency was at $US1.10, it's made a series of lower highs, and now, with the break overnight, lower lows," RBS senior currency strategist Greg Gibbs said.

Mr Attrill's 12-month forecast is for the dollar to slip to about US96¢, while Mr Gibbs foresees the currency trading about US98¢ by the end of this year.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Join the Conversation...

There are comments posted so far.

If you'd like to join this conversation, please login or sign up here

Related Articles