MARKETS SPECTATOR: Betting on a Bernanke boost

If, as expected, Ben Bernanke signals no end to quantitative easing this week the Australian dollar might add to its 3.1 per cent rise seen over the past seven days.

The Australian dollar has climbed 3.1 per cent against the US dollar in a week, according to Bloomberg data. Last Tuesday it was at US93.34 cents, according to Bloomberg. Since then it has risen four consecutive trading days.

At 1700 AEST the Australian dollar was at US96.20 cents, up 0.02 per cent from Friday where it was at US96.18 cents, according to Bloomberg. Still, the Australian currency is down 9.2 per cent against the greenback since its $US1.0596 52-week high on September 14, 2012, Bloomberg says.

But the market’s perception of the Australian currency has changed. Now traders are betting that US Federal Reserve chairman Ben Bernanke will tell Congress this week quantitative easing will not end as quickly or at the same magnitude as previously thought. That means interest rates in the US may not rise as previously forecast, making the greenback less attractive as a currency to hold relative to others including the Australian dollar.

Moreover the carry trade is benefitting the Australian currency. Investors borrow in US dollars at an interest rate of about 0.5 per cent and buy Australian dollar with a yield about 2.75 per cent.

Andrew Salter, ANZ’s currency strategist, says the Australian dollar last week “tested” its fundamental value of about US93 cents when traders believed US monetary policy was going to be less loose.

ANZ forecasts the Australian dollar will retest its levels of last week. Salter has a year-end forecast for the Australian dollar of US92 cents. His earlier year-end forecast for the local currency was US105 cents.