Aussie Dollar Marching Forward
In keeping with a view Business Monitor International (BMI) has been promoting for some time, the Australian dollar is looking good against a number of regional currencies. Though I have already spoken of its relative value against the euro, I think the Aussie also looks particularly attractive against the Japanese yen. Consider the following chart:
Exchange Rate, JPY/AUD
Having made a break of resistance at JPY65.00/AUD, and then held that level in subsequent days, the Australian dollar appears headed to the mid-JPY70.00s /AUD over the short to medium term. As in the case of the euro, I see two possible trajectories towards this target. The first could see the Australian dollar retrace to short-term support at JPY66.00/AUD, before ultimately heading to the mid-JPY70.00s /AUD, while the second envisages a more or less uninterrupted appreciation.
In both cases, however, I believe the fundamental driver of this cross rate will be Australia’s comparative strength on the macroeconomic front. True, BMI is forecasting real economic growth of -1.5% in 2009, but that is still far better than the -6.1% contraction I foresee in Japan. Moreover, with rates in Japan at near-zero and the return to deflation all but guaranteed, the Aussie dollar will benefit from a considerable interest rate differential with the yen. This is especially so if the Reserve Bank of Australia’s rate-cutting cycle bottoms out at 2.50%, instead of the 2.00% that I originally envisaged.