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Australian dollar finds steadier footing, still a "tweet away" from a tumble
[SYDNEY] Australian banks have suddenly turned optimistic on the country's currency as a spate of surprisingly upbeat news on world growth underpins gains in key commodity prices, even as the spectre of a global trade war haunts the future.
The Australian dollar is the best performing major currency of the year so far, climbing nearly 4 per cent to US$0.7477.
That's a marked turnaround from late December when it hit a seven-month trough of US$0.7160 as the US dollar rode high on wagers that President-elect Donald Trump's policies would stoke US inflation.
That reflation trade has faltered as Mr Trump failed to offer any details at a recent news conference on what stimulus might be forthcoming.
At the same time, economic data from Asia and Europe have taken a notable turn for the better, putting fresh vigour into prices for Australia's top resource exports.
Iron ore is close to two-year highs, thermal coal close to a 3-1/2-year peak while coking coal hit its highest in 5 years last month.
"The current commodity story is more positive than many in the market believe," said Rob Rennie, global head of market strategy at Westpac, who expects the Aussie to push through to 75 US cents in this quarter. "Higher prices and higher volumes will continue boosting both nominal and real export activity through 2017. This story is underpriced by the FX market," he added.
The surge in commodities has already blessed the country with its first trade surplus in three years, and more are likely in the months ahead.
Analysts at ANZ say their measure of factory activity globally has touched its highest since 2011, with all major regions making a contribution to above-trend momentum.
That is one reason ANZ's head of forex research, Daniel Been, recommends buying the Aussie at US$0.7380, with a target of US$0.7800. Only a pullback to US$0.7150 would threaten the bullish outlook.
Still, analysts concede that everything could change for the worse should Mr Trump press ahead with protectionist measures against China, Australia's single biggest export market.
Mr Trump has promised to name China a currency manipulator on his first day in office in January, and to slap 45 per cent import tariffs on Chinese goods.
The Aussie dollar, being the world's fifth-most traded currency and so closely tied to commodities, would certainly be dumped should Mr Trump and Beijing truly lock horns.
"There is a keen sense in the market that we are just one tweet away from another tumble," warns Mr Rennie at Westpac. "Thus even if we are correct, and the A$ is cheap, gains will be strongly capped by US$0.7450/0.75."