Aussie dollar in focus ahead of meeting minutes

<p>The Australian dollar (Aussie) is stuck between ‘a rock and a hard place’. In terms of fundamentals, the resumption of more money printing post QE3 […]</p>

The Australian dollar (Aussie) is stuck between ‘a rock and a hard place’. In terms of fundamentals, the resumption of more money printing post QE3 announcement last week makes it one of the most attractive counter currencies to the US dollar. The Aussie has a strong correlation to the price of copper which has bounced from recent lows of around US$3.30/lb to levels slightly above US$3.80/lb with US$4 in sight. But something else is happening in the Australian economy – the mining and energy boom is slowing down, not going away, but the intensity experienced since 2009 is moderating slightly. The terms of trade will be impacted by lower coal and iron ore prices; the agricultural space remains solid but is not immune from wild weather patterns. All other export sectors are losers.

Unemployment is relatively low by historical and global standards but consumer confidence is also at a very low level, as is business confidence. China is a huge medium to long term growth driver, even if there is a short term moderation in the rate of growth. Australia also enjoys one of the few remaining AAA credit ratings, low government debt to GDP and above average GDP growth. With so many mixed signals, Tuesday’s RBA meeting minutes will be closely watched, as will presentation by the Assistant Governor, Guy Debelle, at the FINSIA, CEDA and ICAA luncheon. The following day, Assistant Governor of the Economic Group, Christopher Kent, will present at the “Structural Change and Rise of Asia” conference jointly hosted by the IMF.

The next 48 hours will be closely watched by global traders. Solid support has developed around the AUD/USD 1.04 range where the 20 and 50 day moving averages are converging. The tone from the Reserve Bank of Australia will either be one of further admission that more needs to be done in the short term to ease pressure on domestic demand by cutting rates or a more balanced admission that the global economy should improve and with it Australia’s above average rates of growth. The decision to maintain rates on hold earlier this month contained very little new commentary, so tomorrow’s meeting minutes will be closely scrutinised. The mining and investment pipeline, which underpins the RBA’s bullish near term outlook, continues to face timing pressures with contractors like Macmahon Holdings in a trading halt today, expected to hose down earnings estimates.

The overall pipeline of work is unlikely to disappear, but timing might be pushed out until global market sentiment improves. The incentive to develop projects is still there for the major miners – debt is cheap to those who have a capacity to repay it and commodity prices, like copper for example, are still very high compared to historical averages. Projects like Chevron’s $60bn development of Gorgon Gas off the coast of Western Australia are unlikely to disappear, but the timing of the investment pipeline could shift by a few years. If the RBA sees this as a possibility, then it might be able to argue that the timing impact can be countered by short term easing to offset weak demand elsewhere in the economy. Sentiment aside, the interest rate differential between Australia and its international rivals still remains large, even if the RBA does cut by up to 100bpts over the next year.


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