Another look down under

Sean Callow, currency strategist at Ideaglobal, offers another top cross rate pick. He points to the AUD/USD as a hot cross to watch. A daily chart reveals the Australian dollar has been screaming higher vs. the U.S. dollar in recent weeks. The cross rate soared from a low at 68.53 in early September to the 78.45 area in mid November.

First, Australia is boasting an interest rate of 5.25 percent, or the second highest in the industrialized world right now.

“That is a good solid yield for anyone to be sitting on right now,” Callow says.

Also, the country is enjoying solid fundamentals, including a strong domestic economy lately, with unemployment in October hitting its lowest level (5.3 percent) since 1978. Gross domestic product growth is expected to remain robust in the 3.5 percent area.

“The strong domestic economy underpins the relatively high interest rates, with no fears of a rate cut,” Callow says.

Another factor supporting additional gains in the AUD/USD is the rising cost of exports. Australia is a major exporter of coal, wheat, natural gas, gold and steel. The Reserve Bank of Australia estimated its commodity price has risen 16 percent year-over year, as of October.

“That directly helps Australia’s export revenue,” Callow explains. Callow also notes that speculators looking for a place to put on bearish trades on the U.S. dollar have an advantage of buying the Aussie dollar because, “you get a decent yield pickup and are not likely to face a central bank on the other side. The Reserve Bank of Australia does intervene at times, but generally it is small scale. They will not be trying to take on the market.”

Near term, Callow sees the AUD/USD testing the 80.00 mark, possibly before year-end. If that level cracks, Callow expected additional upside momentum toward the 82.00 or 83.00 area by first quarter 2005.