Australian dollar rebounds: a week of highs and lows

Allison Jackson | October 31, 2008

THE Australian dollar staged a double-digit rebound against the greenback and the yen this week after risk appetites improved.

The Aussie surged nearly 15 per cent against the US dollar and 22 per cent against the yen after the Reserve Bank intervened three times to prop up the battered currency and United States and Chinese central banks slashed interest rates.

The local currency had plunged to a five-and-a-half-year low against the US dollar and the lowest level against the yen since the end of World War II this week as investors dumped risky bets amid fears over the deteriorating world economy.

Just three months ago investors were speculating the Aussie could reach parity with the US dollar after touching a 25-year peak against the greenback on the coat-tails of booming prices for Australia’s rich mineral resources, the country’s high interest rates and confidence that China’s economy would protect Australia from a sharp downturn.

But the commodity bubble has burst, with oil sliding 54 per cent from its July peak just in three months, and what started a year ago as the US sub-prime mortgage crisis has morphed into a global financial crisis that has slammed the biggest economies.

And the Reserve Bank has cut official rates by a total of 125 basis points.

Investors earlier this week were debating whether the Aussie would fall below US60c. Now some analysts predict the Aussie could move back up to US70c or even US80c by the end of this year, even if the Reserve Bank cuts interest rates further.

The Aussie slumped to US60.1c on Tuesday, the lowest level since April 2003 and 40 per cent below July’s 25-year peak of US98.49c, before rallying to US68.9c on Thursday and by late this afternoon, it was trading at US67.19c.

Against the yen, the Aussie traded as low as Y55.10 before recovering a fifth of its value two days later to trade above Y65 – it now trading around Y66.01.

ANZ Investment Bank senior currency strategist Tony Morriss said the Federal Reserve’s move to sign currency swap agreements with Korea, Singapore, Mexico and Brazil this week supported the Aussie.

As did Reserve Bank deputy governor Ric Battellino’s comments yesterday that stubborn inflation would limit further interest rate cuts in Australia and that the country was on track to avoid a recession.

NAB Capital head of currency strategy John Kyriakopoulos said the bounce in global equity markets this week also helped boost confidence and gave investors the courage to buy higher-yielding currencies.

“A further easing in fears of a deep and prolonged global recession was evident, which boosted the Australian dollar across the board,” said Mr Kyriakopoulos.