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Undervalued Australian Dollar Higher in 2019 (CIBC); Franc, Yen at Multi-Month Highs on Haven Demand

There’s been no letup over Christmas for the Australian dollar, which continues to threaten the 70-US cents handle. The Aussie may appreciate as high as 78 cents in 2019, an expert has said. Meanwhile, safety-driven inflows have forced the franc and yen much higher, but oil prices continue to weigh heavily on the Canadian dollar.

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There was little Christmas cheer to be had for the Australian dollar last week, which traded sub-70.5 US cents on all 4 trading days and which sank as low as 70.16 cents at one stage on Thursday—its lowest level since February 2016.

That isn’t necessarily a bad thing, though, says CIBC foreign exchange expert Patrick Bennett, depending on your perspective of course.

At current levels the Aussie “is very undervalued,” Bennett told CNBC, and it remains his “best bet” for 2019.

“We think there is going to be a resolution to the trade tension between China and the US, and that leaves [AUD] very well positioned.

“Against the US dollar, we’re looking, in the second half of the year, to be well north of 75 cents; after that 77 or 78 cents.”

AUD to USD - 1 Week chart - Latest
AUD/USD - 1 Week Chart - Latest

With that said, now would mark a good time for those outside Australia to make AUD payments or pick up the currency for speculative purposes.

The Australian dollar is, of course, on one side of the risk spectrum; its value increases whenever investors are upbeat and in the absence of political or economic uncertainties. This partly explains the Aussie’s 10 percent decline relative to the US dollar this year, what with tariffs on massive amounts of global goods threatening demand for Australian commodities, with Brexit creating chaos in Europe, and stock investors reeling from massive third-quarter losses.

On the other half of that risk spectrum has been the Swiss franc and Japanese yen. Both are traditional safe havens in times of uncertainty and both responded with verve to reports on Thursday suggesting President Trump will soon enact an executive order that would ban US telecoms companies from using products made by Chinese technology giants Huawei and ZTE.

As Friday ended, the US dollar bought only 0.9835 francs, from 0.995 francs the week before, which represents the Swiss currency’s strongest weekly performance since August. Prior to a bout of profit-taking late on Friday, a 2-month high (USD/CHF low) of 0.98 francs was achieved.

The yen benefits even more so from Washington’s questionable policies, and did so again on Friday with a move towards the 110-yen handle. Friday’s close of 110.25 yen was the Japanese currency’s strongest closing rate against the greenback in 4 months.

“The yen can be somewhat stronger for a little bit longer, particularly when we have got some uncertainty in stock markets,” CIBC’s Bennett said.

USD to CAD - 1 Week chart - Latest
USD/CAD - 1 Week Chart - Latest

Energy markets, meanwhile, continue to weigh heavily on the Canadian dollar, which has lost 6 percent of its value since October 1st.

Brent crude futures, the global benchmark for oil traders, fell early last week to just $50 per barrel—a long way from October’s high of $86.72—before recovering to $53 before the week was out. Oil products are Canada’s largest export and for that reason the Canadian dollar closed at a 19-month low (USD/CAD high) of C$1.3637.

For the US dollar as a whole, a strong 2018 rally has fizzled out in recent weeks; however, “seasonal pressures are likely to keep USD elevated into January at least,” says Scotiabank’s Shaun Osborne.

The US Dollar Index, which measures the greenback’s performance against a basket of major currencies, trades currently at 96.39, midway between its Jan ’17 peak and Feb ’18 trough.


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