Looking For An Aussie Win
By NICHOLAS HASTINGS
A DOW JONES NEWSWIRES COLUMN
LONDON -- If deficits are now bad and surpluses are now good then the Aussie and several other currencies should now win.
In fact, currencies representing countries with budget surpluses should continue to rise even if risk appetite is no longer strong.
This week has brought a distinct shift in trading patterns as an outright downgrade of Greek debt and a negative warning on Spanish debt has sent investors scurrying out of the euro.
In both cases, the chances of sovereign default are reckoned to have grown as both these countries have allowed their budget deficits to balloon. Even if other euro-zone countries eventually come to their rescue, the whole issue of deficits has now come to the fore.
The level of market fear was also apparent in investor reaction to the latest pre-budget report in the U.K., which failed to provide any real reassurance that the U.K.'s massive deficit will be reduced soon.
Investors appeared to focus on rather over optimistic government growth forecasts for the next few years and used this an excuse to eject from some sterling assets.
As the euro and the pound pay the price for this Greek, Spanish and U.K. profligacy, then those countries that have managed to build surpluses --Australia, New Zealand, Norway and Sweden--should stand to benefit.
Up until now, most of them were already getting support from their more robust economic recoveries and the prospects of higher interest rates.
In Australia's case, strong employment numbers this week has raised speculation that the Reserve Bank of Australia will continue hiking interest rates again as early as next month--ensuring that Australian yields remain among the most attractive in G10.
The Reserve Bank of New Zealand hasn't been quite so aggressive and left its rates unchanged this week. However, the bank abandoned the line that rates need to stay low until the end of 2010 and speculation is now rife that they will rise by the middle of next year.
The Riksbank is also expected to give the hawks something to feed on as Swedish economic data is expected to improve in coming weeks.
"Though the Riksbank has remained dovish, stronger data in the near future should ultimately persuade the Riksbank to reassess keeping the policy rate flat until 2010," said Gareth Berry, a currency strategist with UBS in Singapore.
In the past, this prospect of higher yields would have helped the Australian and New Zealand dollars, as well as the Norwegian krone and the Swedish krona, but only when global appetite for risk was high and high yields were in favor.
However, now that budgets are in focus, these currencies should continue to benefit even if investors have lost their appetite for risk.
Early Friday in Europe, risk was back on the table. Not only did Moody's reassure the U.S. and the U.K. that their triple-A ratings are fine for now but China released strong data including a 19.2% rise in industrial production over the last year.
As equity markets headed higher, with the Nikkei gaining 2.5% on the day, investors moved back into higher yielders with the euro rising to Y130.74 by 0645 GMT from Y129.92 late on Thursday in New York, according to EBS.
The dollar rose to Y88.75 from Y88.21. The euro was only marginally higher at $1.4733 compared with $1.4729.
--(Nick Hastings has covered the foreign exchange markets and industry for over 20 years. Apart from his written commentary and analysis, he also appears on Fox Business News and CNBC television in Europe, Asia and the U.S. He can be contacted on +44-20-7842-9493 or by email: nick.hastings@dowjones.com)
ABOUT
Forex Focus is written daily by Nicholas Hastings and spotlights trends in the global foreign exchange markets, putting the day's currency-trading events into context. It aims to provide an early morning, forward-looking analysis for market watchers but also discusses broader issues that could impact currency dealing in the near-term.
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