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Australia dollar tracks sideways

Sunday, January 6, 2008

SYDNEY (Thomson Financial) - The Australian dollar was tracking sideways Monday as traders debated whether the risk of recession in the US would undermine the commodity-based currency.

ANZ senior currency strategist Tony Morriss said traders had returned to work after the Christmas/New Year break unsure which way the Aussie would track.

He said its attraction as a high yielding currency was being offset by growing risk aversion due to weak US economic data and continuing volatile financial markets.

At 5.35 pm (0635 GMT), the Australian dollar was at 87.38 US cents from a close of 87.20 on Friday.

"There's genuine debate about the Australian dollar's direction with weak US data, including Friday's job report, raising concerns about the global growth outlook while the likelihood of further rate cuts by the Federal Reserve means there could be support because of the interest rate differential," Morriss said.

US non-farm payrolls rose by just 18,000 in December, the lowest result in almost five years and well below expectations for a gain of 70,000.

There is a wide variation in views about the direction of commodity prices which is impacting on the Australian dollar, said Morriss.

The currency is caught in the cross fire of a lower global growth but higher inflation scenario, he said.

In Australia, the Reserve Bank of Australia is maintaining a tightening bias while in the euro zone, inflation remains a concern. European Central Bank president Jean-Claude Trichet said during the weekend that the ECB governing council stands ready to counter euro zone inflation risks which are "clearly on the upside" .

In the US and the UK, central banks are more concerned about deteriorating growth prospects.

Commonwealth Bank of Australia chief currency strategist Richard Grace said Friday's weak non-farm payrolls report for December, has added to the cloud over the global growth outlook, causing uncertainty on equity markets.

"The risk is that the equity market continues its decline after taking its lead from the weak US non-farm payrolls report on Friday. If this is the case, the Australian dollar is likely to come under some downward pressure, despite the possibility of firm local data," said Grace.

He said the risk for the first full trading week of 2008 is a lower Australian dollar.

The Australian dollar is likely to remain vulnerable for the next two months at least, said Grace. Further volatility is likely on equity markets as the US fourth quarter reporting season gets underway in February and the first European reporting season since the emergence of the credit crisis also gets underway.

But the solid strength of the domestic Australian economy will provide support to dips on the Australian dollar as will Australia's attractive interest rate levels, he said.

"But despite the solid domestic picture, the offshore picture will dominate, with the risk being a test of the mid-December low of 85.54 US cents," Grace said.

Investors should purchase some short dated two-month Australian dollar puts to either protect exposure or capitalise on the dips, he said.

Posted by MOHAMED SAID at 11:44 PM  

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