Monday, September 15, 2008

Why is the $US appreciating?

Something that has been bugging us of late is… why is the $US appreciating while the US economy is on the brink of disaster? But is it?

June quarter stats indicate that, on a quarterly basis, US economic growth is now out-pacing the rate of growth in Europe, Japan, Australia and (most likely) New Zealand. Despite the fact that the catalyst for the current global slowdown originated in the US, the quick response by US authorities, and the competitive benefits of a six-year depreciation in the $US, have combined to lift the relative rate of US growth and the relative attractiveness of the $US.

But as the impact of US fiscal stimulus measures ease into year’s end, the rally in the $US may pause until the US fed starts raising rates. This is not likely until the US housing market has bottomed, probably sometime in 2009. Higher US interest rates (and low rates in Australia) will remove a pillar of support for the $A and force it back into the low 70s, where it will be supported by investors attracted to the exposure of the Australian economy to Asian growth.

Wait for spikes in soft commodities to throw up good hedging opportunities on the back of a weakening $A.

It didn't take long
The release of another six bulk export licences last week set-off a flurry of competition in WA – previously the world's most undervalued wheat market. Almost overnight, WA wheat prices moved to a $10/t premium to the east coast. Prior to last week, WA prices were carrying a discount of some $10-30/t on east-coast values.

The move was probably a little illusionary, with east coast basis and the domestic premium easing on the excellent rain in sth QLD and nth NSW. Underpinning the rally in west-coast basis was buying by South-East Asian exporters for Dec/Jan/Feb shipping slots.


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