The Aussie dollar is falling sharply. It must be time to buy.
In the great currency smackdown of recent days, the Australian dollar has copped some of the worst of it. Partly because it was trading above where it should, but also because it is a key “risk” currency that tends to shine when the general market mood is better and investors are willing to enter carry trades to get yield.
The currency has fallen against the U.S. dollar and the Japanese yen in particular, and even the Kiwi dollar, against which it normally commands a healthy premium. It is now down near US$0.8316, from around US$0.9260 only three weeks ago.
This column has argued before that the Australian dollar was overvalued. Certainly there was never a justification for it to go to parity.
Some of the factors underpinning its previously-lofty levels look less certain. China in particular has been the big shining light for Australia, buying up its raw materials and helping in no small measure to lift the Australian economy quickly from its slump, but there is the likelihood that China’s growth slows.
The Aussie until recently also benefited from a fairly protracted period of market calm; better stock markets equate to gains for riskier currencies. That has all changed.
Plus the rapid interest rate hikes from the country’s central bank have put it ahead of the curve in terms of yield appeal. Consider what you can get for your money in Australia, compared to the smaller return available in Japan or the U.S.
That’s why the Aussie was set up to fall hard. And fall it has. But the declines should probably be close to done.
The pace of the drop should have washed out a good amount of long positions. The currency has come back to more realistic levels. The reasons to like the Aussie–and there are a fair few–should become more apparent soon.
There should be some serious questions asked if the currency were to push much under the 80 U.S. cent mark; certainly the still-solid economy doesn’t justify such a drop. It would amount to cruel and unusual punishment for a currency that was overpriced for a while but has already corrected to a more reasonable setting.
Survey the landscape–what else is there to buy? The euro? The Thai baht? An already-stronger U.S. dollar?
Given the fairly unexciting alternatives, and the fact the Aussie economy is still in much better shape than elsewhere and rates are higher, there are liable to be some supporters. If the fall continues at a similar pace, one of those supporters could be the Reserve Bank of Australia, which rarely enters the market but may do so to restore order.
(This is a Money Talks column that first ran on Dow Jones Newswires)