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China data buoys dollar to four-month high

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The Australian dollar has risen to a four-month high, inching above $US1.06 this morning on the back of US market enthusiasm over better-than-expected trade data from China yesterday.

The dollar peaked at $US1.06 around 9am today before falling back to $US1.0595 at about 10am, its strongest since mid-September.
The dollar is currently trading around $1.0584.

“Asset markets are taking a very positive view about the global growth,” said Derek Mumford of Rochford Capital, a currency-risk management firm.

“The market is potentially over-positive and all these risks will come home to roost at some stage in the next couple of months. But at this moment, there is risk appetite and equity markets are buoyant … and the Australian dollar is reflecting that.”

But while the rising dollar is expected to bring cheer to consumers, its strength has continued to put the pressure on some of Australia’s key industries, including tourism and manufacturing.

Chinese CPI prompts slide
The dollar later slid versus most of its 16 major counterparts after data released this afternoon showed inflation in China, Australia’s biggest trading partner, quickened more than expected and spurred concern policy makers will struggle to balance price gains and growth.
”The fact that the [Australian dollar] struggled so hard to break through the $US1.06 level and didn’t quite make it made people wonder whether it’s due for a little bit of a pullback,” said Sean Callow, a senior currency strategist at Westpac. ”I think it’s broadly going to be supported on dips.”

NAB lowers interest rate forecasts
The continued rise of the dollar came as the National Australia Bank announced that it was lowering its interest rate forecast for this year to 2¼ per cent, “with the economy continuing to weaken and unemployment set to rise noticeably through 2013”.
The bank’s decision goes against financial markets’ expectations of a 30 per cent chance that the Reserve Bank would cut rates again in February, Credit Suisse data showed.
NAB said it expected the Reserve Bank’s first cut to take place in the first quarter, with further cuts in May and August.
In December, ANZ cut its 2013 interest rate forecasts to 2 per cent, citing the weakening mining sector, higher unemployment and the strong dollar as factors.

Stubbornly strong dollar
The Australian dollar has remained strong, despite interest rates cut and earlier falls in commodity prices, a traditional driver of the currency. Iron ore prices have since soared more than 80 per cent since September, climbing to $158.50 a tonne this week.
“At $US1.05 and $US1.06, the dollar is up a little bit on where it’s been in recent months, but really in the scheme of things, it’s been roughly around those levels for quite a while now,” Justin Fabo, the head of ANZ’s Australian economics department head, said.
“The key risk to the Australian economy is if the exchange rate goes another 5 or 10 ¢ higher. Those sectors of the economy that are already struggling with the high exchange rate would be impacted more.

“But even though that will be contractionary for the economy, our policy makers have plenty of room to offset that through looser policy.”
Sean Callow, a senior currency strategist at Westpac, said that

Mr Fabo said the persistence of the Australian dollar meant some companies were having to realign with where they thought the currency would settle – and restructure their business accordingly.
“One of the positives I see move is that our productivity performance has been sub-par over the past decade. And one of the things the currency is doing is making some of those businesses make really tough decisions that they haven’t had to make for a decade,” Mr Fabo said.

“They are tough decisions to make and can even lead to job losses, but it’ll actually make the economy more resilient in the medium term because businesses have to go back to square one, think about how the businesses are run and make the appropriate changes.”

Why the dollar is high
Economists said Australia’s triple-A credit rating – one of just a handful of countries in the world to have one – was part of the reason why the currency remains high.

At the same time the official cash rate, while low by historical measures, is the highest among developed countries.

Meanwhile, quantitative easing, which has seen hundreds of billions pumped into the global financial system, has become a popular tool of monetary policy for the central banks of troubled economies this year, increasing the attractiveness of the Australian dollar’s yields to global investors.

Reserve Bank officials, including the governor, Glenn Stevens, have expressed surprise at the persistently high dollar. But the central bank has stopped short of directly stepping in to influence the currency.
with Bloomberg

Read more: http://www.smh.com.au/business/markets/china-data-buoys-dollar-to-fourmonth-high-20130111-2cjn8.html#ixzz2HdPCO8mE

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