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Aussie rebounds, but outlook remains negative

H.S. Borji
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The Australian dollar edged higher against its US counterpart Thursday, rebounding from a fresh eight month low on the heels of positive building permits data. Long-term, however, fund managers warn of bigger falls for the Australian currency as the markets correct themselves following the culmination of the United States Federal Reserve’s quantitative easing program.

The AUDUSD surged to an intraday high of 0.8816, after trading at a low of 86.66 on Wednesday. The pair would subsequently consolidate at 0.8781 advancing 0.6 percent. The pair is likely to find initial support at 0.8683. On the upside, resistance is ascending from 0.8772.

The Aussie-to-US dollar exchange rate is pacing for a weekly gain of 0.6 percent following several months of volatile trade. The pair has plunged 7.5 percent in the last three months amid shaky Australian fundamentals, signs of weakness in China and broad support for the US dollar.

The Aussie was supported on Thursday after building permits rose faster than forecast. Authorizations for building projects rose 3 percent in August, following a gain of 2.1 percent the previous month, the Australian Bureau of Statistics reported today. Economists forecast a monthly gain of 1 percent.

Year-on-year, building permits were up 14.5 percent, official data showed.

Australian data have been mixed in recent months. The Aussie was under pressure on Wednesday after retail sales rose only 0.1 percent in August, compared to expectations calling for 0.4 percent.

The Australian dollar has been described as overvalued by the Reserve Bank of Australia, which announced earlier this year it believed the currency was due for a broad correction. RBA Governor Glenn Stevens has repeatedly warned that an overvalued local currency could have negative implications on the country’s recovery efforts, especially in the export sector.

However, economists believe the RBA needs more than words to keep the local currency in check. This includes, among other things, keeping the possibility of a rate cut on the table.

The RBA earlier this month kept its cash rate at a record low of 2.5 percent for the thirteenth consecutive month. That is the longest period of rate stability since 2006.

A fund manager interviewed by The Sydney Morning Herald believes the Australian dollar, at its current exchange rate, is still overvalued. Thomas Clarke, a portfolio manager for William Blair & Company, said the Aussie is set to drop below 75 US cents.

Fair market value for the Australian dollar is 74 to 75 US cents, according to Clarke, whose valuation comes from a careful examination of the RBA’s strategy and global economic developments.

Clarke also maintained the value of the Australian dollar had been inflated for a number of years due the US Federal Reserve’s record bond buying program. The Fed is expected to end its controversial quantitative easing program next month, paving the way for an interest rate hike sometime in 2015.

Based on the US dollar’s performance in the last few months, investors are betting the Federal Reserve hike interest rates in the early part of 2015.

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