Pete Wargent blogspot

Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

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Monday, 7 January 2013

What will happen to the Aussie dollar in 2013 - and what effect will it have on investment markets?

Resilient Aussie battler
Despite a series of interest rate cuts bringing the cash rate down from 4.75% to historic lows of just 3.00%, the Aussie dollar remains at a very strong level.
At the time of writing the Aussie is still buying more than 104.8 US cents, which in part reflects the relative weakness of the greenback, and the fact that interest rates have been stuck at the bottom of the zero bound in the US for several years now.
Today’s exchange rate is a world away from when the Aussie dollar was in the 60 cent bracket as the sub-prime crisis played out.
In an unusual move the Fed Reserve in the US has pledged to hold interest rates at just 0.25% until unemployment levels fall from their present level of 7.8% to a target rate of 6.5%. Low interest rates of just 0.50% are also in evidence in Britain and thus one pound sterling (GBP £1.00) only buys around AUD $1.55 today which is getting close to half of the levels we once saw.
The Aussie dollar has not been much stronger than its present level since it was floated on 12 December 1983. In July 2011 the Aussie reached its post float high of 110.8 US cents. Its nadir had been in April 2001 when the Australian dollar plumbed the depths of 47.75 US cents.
Comparatively high interest rates and a perceived stable currency in a country tend to attract investment into that jurisdiction as investors seek stronger yields on assets such as government bonds. If a country is economically healthy and has relatively high interest rates it is reasonable to expect that its currency will strengthen.
Forecasts for 2013
Only a month or so ago it was forecast that the Aussie dollar is likely to begin to slide to around 80 US cents in the second half of the year. On a historic basis that would seem to be a more ‘normal’ level for our currency. And yet the latest round of surveys had most tipsters predicting that the dollar will stay above parity this year. What gives?
The unpredictability of foreign exchange rates
Famously the Fed Reserve spent a great deal of time some years ago building a system which was intended to enable it to predict future movements in exchange rates using more data and brainpower than had ever been applied before. The only problem was that once in action it proved to be effectively useless, causing the former Chairman of the Fed Alan Greenspan to bemoan that ‘the rate of return on investment of the project was zero’.
This merely underlines that foreign exchange rates are inherently unpredictable and also explains why so many would-be currency traders eventually end up generating net losses. With so many currency speculators now in the market, short-term currency movements are a crapshoot.
In fact, whether or not we think about it, many everyday Aussies in effect become currency speculators as we attempt to time our currency exchange for holidays.
Effect on investment markets
While acknowledging that the only certain thing about currency predictions is that they will be wrong, there has been a recent shift in expectation towards the currency remaining relatively strong through 2013, perhaps holding somewhere close to parity.
This will be in part driven by the likelihood that there will probably remain some daylight between interest rates here and those in other major economies. The unemployment rate in the US remained steadfastly high in December and thus the Fed has not moved closer to its target of 6.5% unemployment (and as a consequence interest rates will be staying put for now).
In Australia, meanwhile, the markets implied expectations of a further interest rate cut in February have tapered somewhat over recent days from 66% to just 44%. While our relatively higher interest rates might encourage foreign investment in bond markets, conversely a strong dollar is likely to see in particular Asian investors a little reluctant to pile further money into our share and property markets.

Thus there is a strong argument to suggest that although dismal yields will force many reluctant investors out of cash and into growth assets, recoveries in property and share markets are, on balance, likely to be measured and steady.
The numbers reported seem to vary a little but it is said that jittery foreign investors now hold close to half of Australian listed company shares at some 47%, which is a 20 year high (foreign investors also hold some 80% of our government bonds). This reflects fears of investing in Europe and the US.
Yet one of would have thought that our strong dollar might in part explain why the recovery in our share market since 2009 has been relatively muted as compared to that seen on the Dow (DJIA) in the US. Moreover, there is just not much confidence around at the moment. Merger and acquisition (M&A) activity reportedly fell by almost 60% in 2012.
On the flip side, our strong dollar has seen many Australian investors looking to invest overseas through 2012. Is this a smart currency play? It could be. The dollar is presently very strong on a historic basis, but then again, currencies are unpredictable. Investors should be wary of investing in overseas markets in which they have little expertise. As always, the risk does not lie as much in the investment as it does in the investor.