“Thanks for the Australian coverage recently. Would you mind commenting on the GB£ v AUD.. to me it looks like this is basing with a likelihood of reversing direction.
“If this is the case it would mean any purchases of Australian stocks now would have to contend with an adverse currency move- no?”
Eoin Treacy's view Thank you for your kind words and this question which may be of interest to subscribers. The Deutsche Bank Australian Dollar Trade Weighted Index retested its 2002 lows, near 100, during the 2008 credit crisis and subsequently rebounded to post new all-time highs. The Index has held a progression of rising major reaction lows since 2009 and while it is currently unwinding a short-term overbought condition, a sustained move below 140 would be required to question medium-term scope for continued higher to lateral ranging.
The Pound reached a peak of A$3 between 2001 and 2003 and has since more than halved. As you point out, it lost downward momentum from 2011 and is currently unwinding a short-term oversold condition. However a sustained move above A$1.60 would be required to question medium-term Australian Dollar dominance.
Over the last decade, the performance of the S&P/ASX 200 in British Pounds highlights just how much of an effect the currency differential has had. The Index broke out to new highs in January and is currently consolidating that advance. Provided it finds support above, or in the region of, the previous highs, the benefit of the doubt can be given to medium-term upside potential.
When I moved to the UK in 2000 having spent the better part of a year in Australia I remember being disappointed with what I got for my Aussie Dollar's. Today the situation couldn't be more different. To illustrate this change of circumstances a delegate at the Sydney venue for The Chart Seminar in 2011 told me how his son was funding his global travels by coming back to work in Australia periodically rather than finding employment abroad because his Australian Dollars would go further.
The other side of this equation is that while Australia remains a favourable investment destination for foreign investors, it has also been among the better destinations for local investors because of the strength of the Aussie Dollar, high yielding equities and the franking system for dividends. When the Australian Dollar eventually peaks the comparative advantage of non-Australian assets is likely to improve considerably for domestic investors.