By Andrew McKay

AUD
The AUD has suffered its worst sell-off in a number of years, dropping 12 cents in just three weeks. A peak in oil prices and commodities in general has been a key factor, but an apparent peak in Australian interest rates has also removed a key element in favour of the AUD.

 

In the short term the current fall now looks over done. A period of some stability and a recovery can be expected.

However, we have been warning that the AUD is near a peak with parity unlikely to be reached. This rapid fall confirms the UD has peaked for this cycle.

Taking a view of the medium term, the multi-year upward trend in the AUD has now clearly been broken. There have been arnings that the upward was near an end for some time.

Commodities and interest rates have been the factors pushing the AUD towards parity, but data from the Australian economy uggesting it is weakening substantially means interest rates are likely to be cut by the RBA to counter the risk of recession.

In addition, commodities have fallen from recent highs and the USD has bottomed. The AUD has now peaked for this cycle, too. Parity will not be reached and further falls below 0.80 are likely in the medium term.

GBP
Sterling’s strength through mid July was surprising, but the failure to maintain the rise above 2.00 was significant, and only the weak USD prevented the GBP from falling.

A change in investor sentiment towards the USD released the pressure on GBP and it has subsequently plunged.

In the short term, the GBP may have fallen too far too quickly but the trend is now clear, and the GBP has further ownside potential.

In the medium term, the risk of a recession in the UK is increasing. The economy is slowing, housing prices are falling and unemployment is rising.

Lower interest will be required to counter the deteriorating fundamental picture, and there is risk that the UK economy may suffer more than the US.

The GBP still has an interest advantage to the US but the outlook is negative and the GBP will suffer as a result.

Euro
Last issue we suggested that it is possible that the past four months are a pause in the ongoing downtrend in the US. However, the rise to new highs against the euro (1.6040) was immediately met with the USD subsequently rising over 20 euros in the process.

This failure to hold the high and subsequent plunge is an important signal that sellers of the USD are no longer dominating this market.

In the short term the USD has risen too quickly but the March low for the USD is unlikely to be tested any time soon.

In the medium term, many analysts had been tipping a further collapse in the USD and a rise in the euro into the 1.80s.

While anything is possible, keep in mind that the USD has been falling for more than six years already.

No doubt the fundamentals for the USD are poor but are they at their worst right now? And yet the euro is now failing to aintain new highs against the USD, which is not consistent with the bearish USD view.

In the very, very long term the USD will fall but the current downtrend in the USD is now over.

Asia
The Chinese Government appears to be switching focus from inflation to growth. If that is true then the speed of ppreciation may slow again but it is unlikely to reverse direction.

The SGD will retain its relative strength against most currencies based on economic growth and inflation, but as the USD bottoms then the SGD will peak against the USD.

In the medium term we expect INR to return to its position as one of the strongest currencies as it was in 2006-2007. In the hort term, a stronger USD may see the INR trade lower, but this is not sustainable.

The NZD is probably already in recession and interest rates are already headed lower. The NZD has fallen substantially but has considerable further downside potential.

Andrew McKay is the CEO/CIO at Absolute Asset Management. For more information contact your Financial Partners adviser.