6 February, 2012
Euro Consolidation Overall Bullish
Australian Dollar Continues to Fly
Concerns about Greece remain over inflated,
but also a lot of bears finally gave up and started to get long the
Euro recently. The Euro may therefore be a little top heavy in the short
term, but the overall up-trend is highly likely to resume following
this short term consolidation phase at current levels.
This is not to say that Greece is not at yet another tipping point, but
that while there will be some last minute posturing by various leaders
within Greece so as to maintain voter support, the final discussions
though tense, will nonetheless be successful. I have to make the point
though, as conditions in Europe are incredibly icy, and this freeze will
do nothing for Q1 GDP, as the union as a whole will be significantly
impacted, let alone discussions with Greece, that a default scenario is
extremely bullish the Euro should it occur.
The Euro will rally strongly despite improving employment in the US,
as all the bad news, and it is argued here a dis-integration scenario
that was never going to happen, is already priced in the Euro. Therefore
the upside potential for the Euro upon agreement regarding Greek
funding requirements is extreme. Furthermore, should Greece default, it
will eave the union immediately, and this would allow the Euro to rally
strongly as well.
It is very cold in Europe and this serious
weather situation will take the wind, what there was, out of the sails
of economic growth this quarter. Yet it will still be the force of the
unwinding of an overly bearish sentiment, that is likely to dominate in
coming weeks and months. Therefore we still look for further strong
gains in the Euro over the medium and long term.
The Australian dollar is resolute in its rally, and why wouldn’t it be. The
whole world is set to prosper in 2012, with only Europe to be moderate.
The demand for commodities globally, and especially in Asia, is likely
to increase significantly, and at a greater rate than new reserves are
discovered.
The pricing in of this continued global prosperity, as well
as the decline of commodity reserves, has only just begun. It is not
difficult to figure out that the Australian dollar will continue to
rally. Though in the short term one must be a little cautious, as we
have reached a point where even the previous bears are now joining the
bullish camp. This is always a sign that an unexpected downward
correction may be afoot.
The Reserve Bank will I believe leave rates on hold,
for the reasons I have provided in recent days, rebounding resources
demand, and only a short passage of time since the last rate cuts. There
is no doubt the RBA should cut rates, but whether they do is another
matter. Nevertheless should the RBA cut rates I would expect this to
only generate a short term pullback for the Australian dollar. Such
pullbacks though brief can occasionally be significant in price. With
the bears only recently having moved to long positions there may be some
short term vulnerability in this regard. Should the Australian dollar
experience any pullback whatsoever, it would be something that exporters
and savvy traders alike should take full advantage of.
The end of year target I set at parity at the start of the
year of 1.1300, was upgraded to 1.1700 when the currency quickly
achieved 1.0500, and this revised forecast remains probable.
Clifford Bennett
Chief Economist
White Crane Group
Sydney, Australia.
+61 (0) 423 950 427
clifford@whitecranegroup.com.au
www.whitecranegroup.com.au
