I like AUD!

Following one of the largest, concentrated sell-offs in history, I think AUD has reached historically attractive levels. The collapse of AUD in recent months rivals the largest drop in the last 25 years – even larger in percentage terms than in the 2-3 years following the 1983 AUD float. The combination of events, including collapse of commodity prices, risk aversion, rewinding of long AUD speculative exposure, malfunction of global banking system etc – contributed to a drop of nearly 50% in about three months.

I am not a strong advocate of timing investment and timing an improvement in sentiment remains difficult.

Last week, I read statements from RBA that Australia may avoid recession this time around, like 2001 and 1997/98. That is very comforting as far as it provides floor support for the currency. In both cases, timely reduction in cash target of 275bps in 1996/97 and a 200bps cut in 200/01 and significant current depreciations were most helpful. The officials point out that if the RBA cuts rates ahead than expectations, while keeping AUD relatively weak and stable, it should help to minimize recessionary threat. The RBA has stunned financial markets by announcing a full-percentage point cut - double what analysts had tipped in early October 2008. Australia's official lending rate was lowered by the most since May 1992.

I sense the drop in AUD seemed to reflect some of the extreme pressure in bank funding markets as well. As global central banks continue to adopt aggressive monetary easing and fall in bank wholesale funding costs, particularly prime money market funds in the US will help to lower one major impediment to a stabilization of risk appetite for AUD.

One should take note that the AUD’s commodity export basket is about 165% higher than its rather stable average throughout 1997-2001, including a 67% gain in the past year alone. According to estimate by Bank of America, the gain in Australian foreign terms of trade gains are providing a 5% boost to real domestic fiscal stimulus and that will help to cushion domestic demand from the impact of the global credit crunch – another stand-out factor as currency supportive.