‘Whipping boy’ – why the dollar is diving

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杭州龙凤

Thursday’s hefty sell-off has starkly underlined the reversal in the Australian dollar’s fortunes, with the currency moving from being the darling of global investors to their “whipping boy”.

Investors are rushing out of risky assets like the Australian dollar amid growing signals the US Federal Reserve is set to slow down its $US85 billion a month stimulus program as the US economy improves.

The currency plunged to an almost three-year low of 92.62 US cents, a fall of nearly 3 US cents, overnight as Fed chairman Ben Bernanke revealed a possible roadmap towards the end of the bond-buying scheme.

It extended its fall to a new 33-month low of 92.42 US cents shortly before midday as new data out of China, Australia’s largest trading partner, showed that its manufacturing sector weakened in June to a nine-month low.

Australian dollar ‘singled out’

While other commodity currencies such as the Mexican peso, Brazilian real and South African rand have also declined against the US dollar, the Australian currency has been singled out for harsher treatment, currency strategists said.

‘‘[It’s become] a whipping boy for the broader market turmoil that we are seeing,’’ NAB’s head of currency strategy, Ray Attrill, said.

‘‘It’s increasingly clear investors – and not necessarily just investors in the currency markets – have been using the Australian dollar and the liquidity that is available, as it is one of the most largely traded currencies in the world, as a hedge,’’ Mr Attrill said.

‘‘That’s probably why it has fallen almost more than any other emerging market currency. I don’t think it is specifically saying that we are more negative about Australia than we are about Europe. It’s that people have learnt to use it almost as a proxy for broader risk aversion and as the hedge against, for example, long equity portfolios.’’

The recent volatility in the value of the Australian dollar and expectations of a lower interest rate meant the currency was becoming less attractive in the ‘‘carry trade’’,  Rochford Capital Derek Mumford said.

The ‘‘carry trade’’ is where investors borrowed currencies with low interest rates and invested in currencies with higher interest rates. An increase in the volatility of a currency would expose investors to the potential for losses.

The Reserve Bank’s current easing cycle, which has seen it reduce the cash rate by 200 basis points since November 2011, and its continued easing bias also meant the difference in yields between Australia and lower interest rate countries was narrowing.

Westpac chief currency strategist Robert Rennie said the Australian dollar would continue its slide if the US dollar strengthens over the next few days.

‘‘The US dollar has found a strong base here and we should see multi-day gains going forward. The Australian dollar has been singled out in recent sessions for some pretty aggressive treatment,” Mr Rennie said.

‘‘Being liquid and having fallen as much as we have, I think that probably means that this story has further to go … 91.88 US cents is the next big objective that financial markets will be focusing on.’’

Economic fears

The recent slide in the dollar has also re-focused attention on the impact of China’s slowing economy on Australia, weak commodity prices and fears about the transition towards non-mining led growth in the country.

China’s latest manufacturing figures today re-emphasised fears about its slowing economy. The slowdown has also placed greater pressure on commodity countries and their currencies, as it meant there would be lower demand for raw materials, Mr Mumford said.

“All these currencies rely on strong growth from the big economic blocs – China, Europe and the US – that’s part of their attraction. While the global economy is growing strongly, then it sucks in raw materials.

“There’s potential that China – one of the world’s big growth engines because of their huge investment over the last few years and which doesn’t look like it will be repeated – is slowing down.”

The Australian dollar has lost more than 10 per cent of its value against the US dollar since early May, when it was trading at 103 US cents.

On the Reserve Bank’s trade-weighted index, which measures the Australian dollar against a basket of currencies, it has weakened from 80.2 in mid-April to 72.1 today.

Since early May, the dollar has fallen by 12.3 per cent against the Japanese yen from about 102 yen to 89.6 yen. It has slipped 9.6 per cent against the British pound, from 66 pence to 59.8 pence.

It has also dropped by 11.3 per cent against the euro, sliding from 78.6 euro cents to 69.7 euro cents.

The original release of this article first appeared on the website of Hangzhou Night Net.