Making cents of a week of fluctuations

Investors in the dollar were in for an exciting ride as it was buffeted by different forces, writes Glenda Kwek.

Investors in the dollar were in for an exciting ride as it was buffeted by different forces, writes Glenda Kwek.

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

It was a ride that went around the world, reportedly involving George Soros, one of the world's most famous investors, 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 sometimes has been described as one of the world's most overvalued currencies break out of the range it has been trading in for almost a year.

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

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

In Hong Kong and Singapore, Mr Soros - or an organisation or individual with similarly deep pockets - was placing a $US1 billion wager 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 the computer and television screens everywhere: 2-7-5.

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

The wager 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 dollar and how, rather than intervening directly to lower the currency, it had sought to shore up sectors squeezed by its strength while boosting others that were not as badly affected.

The bears were out in force, with analysts noting that a second month of weak jobs data could boost the odds of a consecutive rate cut next month.

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. The unemployment rate was stronger than expected, slipping 0.1 percentage points to 5.5 per cent last month.

The dollar surged on the news, returning to just above US102.4¢, the value it held before 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 cents 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 yen, apparently on the back of stronger jobless numbers and speculation the US Federal Reserve could scale back its bond-paying purchases.

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 out at US100.46¢. At Friday on 5pm on Australia's east coast, it was only slightly higher at US100.63¢.

"The strength of the Australian dollar is really the flipside of the weakness of the US dollar," Mr Attrill said. "It's always been the case that at the point when the US dollar found some significant strength, that was going to be the precondition for the Australian dollar falling."

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. "It looks like there's been a significant topping pattern over the last two years."

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.

By mid-2014, the dollar could be in the low 90s, Mr Gibbs said, although he added it would still appeal to investors as it remained a relatively high-yielding asset.

"It may continue to mean the currency doesn't fall away rapidly, but the medium-term factors all suggest we're going to head to lower levels over time, and perhaps that time is starting now," he said.

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

Related Articles