Markets: Aussie Dollar Follows Markets Down

Sydney, Aug 4, 2008 (ABN Newswire) - The loss on the Australian dollar extended on Friday night as it tumbled below 93 US cents in offshore trading after the market concluded that interest rates here will fall in coming months.

The gloomy news on the economy has all but guaranteed that the next move in rates will be down: not at tomorrow's Reserve Bank board meeting (although there is a slight chance of that happening) but at RBA board meetings next month or in October.

The Aussie dollar fell from 95.84 in Sydney last Friday week to 92.92 in New York early Saturday. That's a fall of around 3% on the week, which is a substantial move, given the tight range it has traded in over the past couple of months.

The close is the lowest in more than two months and means the currency has fallen by more than 5% in just over a fortnight after peaking at over 98 US cents.

The prospect of lower interest rates drags down the yield for investors, an attraction of the currency and Australian stock, property and other assets, especially since the RBA started boosting rates last August in the final round of rate increases.

Helping to send the dollar lower has been the fall in commodities, which dropped 28% last month according to most indexes. Oil is down 18% in the last three weeks, but perked up on Friday on signs of renewed tensions between Iran and the rest of the world over its nuclear program.

Iran said on Saturday it would not back down in its nuclear row with major western countries powers, voicing defiance on the day of an informal deadline set by the West over Tehran's disputed atomic ambitions.

Western officials gave Tehran two weeks from July 19 to respond to their offer to hold off from imposing more UN sanctions on Iran if it froze any expansion of its nuclear work.

That would suggest a deadline of Saturday but Iran dismissed the idea of having two weeks to reply.

The result will be a more volatile oil price this week, which could retrace much of the ground lost in the past three weeks. Perhaps Iran has a major oil sale to conclude and wants a higher price.

Oil prices jumped higher Friday after the Bush Administration set the weekend as a deadline for Iran, a major oil producer, to reply to an international offer of incentives for a freeze in its nuclear drive.

In reaction, New York crude for September delivery, rose as high as $US128.60 a barrel, before retreating to close at $US125.10, a gain of $US1.02 from Thursday's finish.

In London, Brent North Sea crude for September delivery went as high as $US127.94 on Friday. It subsequently settled up 20 cents at $US124.18.

The AMP's Dr Shane Oliver says the rapid downturn in the Australian economy is making it harder to see parity for the Australian dollar with the US currency, being reached in the short term.

"In fact with the market now pricing in rate cuts the ride for the $A could be pretty rough over the next six months with a fall back to around $US0.85 a distinct possibility.

"The long term trend in the $A is likely to remain up though in response to the long term rising trend in commodity prices but for now it is starting to look like parity has been postponed."

But any rise in tension in the middle east could see investors flock back to oil and other commodities, sending the Aussie dollar higher.

The AMP's Dr Shane Oliver says the next few months are likely to remain rough for shares. Shares have the potential to rally further in the short term as extremely negative investor sentiment is unwound.

"However, it is too early to say that the bottom in shares has been seen. The still high oil price, slowing growth virtually everywhere, profit downgrades, inflation worries and the continuing credit crunch are all big short-term headwinds for shares and are likely to ensure a rough ride with possible further falls out to the normally weak September/October period.

"Notwithstanding all the short term uncertainties, we still see shares rallying sharply later this year as the oil price falls further, more central banks including the RBA start moving to cut interest rates helping to improve confidence regarding the economic outlook and as investors start to take advantage of attractive share valuations. 

For those prepared to take a long term view current share market levels offer great long term opportunities, but of course there could be further weakness in the short term.

"Key signposts to look for to confirm that shares are on track for a sustainable rally are: a sharp and sustained fall in the oil price, reduced inflation worries, lower bond yields, more relaxed central banks, slowing US house price falls and a sustained improvement in credit markets. 

Of these the oil price has started to move in the right direction, but needs to fall further, and the other signposts are yet to fall into place.

 

US shares slipped Friday, completing a volatile week, as investors chewed over a seventh straight month of job losses, a huge $US15 billion -plus loss General Motors and slumping the worst monthly sales figures for US cars for 16 years.

The three major indexes fell on Friday on Wall Street and ended the week with losses.

The Dow Jones industrial average was down by almost 0.5%, the Standard & Poor's 500 Index was down 0.6% and Nasdaq composite index slid 0.6%.

For all of the market gyrations last week, all three indexes finished the week almost exactly where they started the week. 

The Dow lost 0.4%, the S&P 500 finished 0.2% higher, and Nasdaq ended less than a point higher from where it started the week.

The Australian stock market is expected to open lower on Monday after a fall on Wall Street, but some companies will receive a boost from speculation of a rate cut by the Reserve Bank of Australia (RBA). 

The futures market was forecasting a 38 point fall for the ASX 200 after trading finished overnight Friday.

The market fell Friday around 1.5%, thanks to worries about financial shares after the Suncorp Metway earnings downgrade and further concerns about the economy.

The ASX200 fell 73.4 points, or 1.47% to 4904, while the All Ordinaries shed 74.6 points, or 1.48% to 4978.

And Premier Investments is within sight (so it says) of snatching control of Just Group, the clothing retailer. Premier says its $780 million is now backed by 46.3% of Just shareholders through arrangements or the share acceptance facility..

The offer of 0.25 Premier shares and $2.095 cash values Just at $3.88 a share, based on Friday's closing prices. 

The extra cash and dividend promised by Premier would increase the price to $4.06. Just shares fell 7 cents on Friday to $3.25, Premier shares rose 8 cents to $7.14.

Premier last week said it may raise the cash part of its offer by 15 cents to $2.245 a share if it receives acceptances for 90% by Wednesday, August 6. Shareholders may also get a dividend worth 4.5 cents for each Just share.

Mirvac and AMP Capital, Australian-based asset managers, have stopped redemptions from some of their property funds as investors dump property assets amid the global credit crisis.

Mrivac froze three mortgage funds holding more than $243 million, according to a statement from the joint venture Mirvac AQUA's. AMP Capital, the investment management arm of Australia's biggest life insurer, halted withdrawals from $NZ420 million in a New Zealand property fund, two days after Suncorp-Metway Ltd. suspended a $NZ249 million fund.

And in good news, Apache Corp, the US energy group, says it now expects gas from its Varanus Island (off the WA northwestern coast) plant to be available this week in limited quantities. The plant was shut after an explosion on June 3.

The company says partial sales will begin in the "next few days'' with initial production expected to be 110 million cubic feet of gas a day. That should double later in August, with full output of 330 million cubic feet by year-end.

The June 3 blast damaged pipelines at the plant and cut 30% of Western Australia's gas supplies. The disruption left mining companies and small businesses scrambling to secure fuel in the state. 

The state's Chamber of Commerce and Industry claimed the accident could cost the economy $6.7 billion. The news will be welcomed by Santos which has a joint venture with Apache in one of the producing fields serviced by the facility.

 

And, amid weak markets in Europe, Asia and the America's on Friday, none were as damaged as Ireland's market where the main index, the ISEQ Index dropped the most in over 10 years after a leading drug company's shares plunged 46% on news of problems with a new drug.

Elan Corp, Ireland's biggest drugmaker, confirmed of two new cases of a deadly brain infection in patients taking its Tysabri drug for multiple sclerosis.

The Index plunged 6.5%, or 281.92 points, to 4,089.7, on the news, the biggest drop since October 1997.

The index had earlier fallen as much as 9.5%, under the 4,000 mark for the first time in five years, on the news.

Bloomberg reckons the ISEQ, is the third worst performing index in Europe after Ukraine and Bulgaria.

That's a bit of a joke: they are highly speculative emerging markets. Ireland is a much more developed economy and the loss is terrible for a market heading for its second loss in a row.

That's after a decade or more of boom-like conditions that caused the country to be called The Celtic Tiger. Now it's more like The Celtic basket case.

Ireland's economy is facing recession and the weakest performance in almost a quarter century.

Elan accounts for around 7% of the Index's weighting, so the loss on Friday was terrible.

The two cases, from the European Union, were the first since the drug was reintroduced in the US in 2006.

Bloomberg said on Friday that the cases of the disease, progressive multifocal leukoencephalopathy, were confirmed this week, Elan's partner Biogen Idec Inc. said.

Earlier last week Elan shares slumped after its experimental treatment for Alzheimer's disease, bapineuzumab, was linked in a study to a brain-swelling side effect. The stock collapsed last week, losing 65% overall.

And the latest commodity price index from the Reserve Bank shows that in July the Index rose by 3.0% (on a monthly average basis) in SDR terms, following an increase of 3.1% per cent (revised) in June.

The RBA said the largest contributors to the rise in July were increases in the prices of coking coal, thermal coal, gold and beef.

The prices of wheat and nickel fell.

In Australian dollar terms, the Index rose by 2.8% last month, following an increase of 2.4% (revised) in June. (And if the 5% fall in the value of the Aussie dollar is maintained for August, there will be another nice rise this month for the index.)

The RBA said that inclusion of ABS export price estimates in the Index for coking coal, thermal coal and iron ore has resulted in an upward revision to the level of the Index in April and May, and a downward revision to June.

Preliminary estimates for these commodities have been incorporated into the Index for July.

While the increase in iron ore contract prices is now incorporated in the Index, contract price increases for coking coal and thermal coal are still flowing through to export prices.

So there will be more revisions and rises this month, and a bit more if the Aussie dollar remains around 92-93 US cents.


 

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