Full Steam Ahead As Dollar Dazzles And Shares Continue Record March

The Age

Friday October 12, 2007

Vanessa Burrow

THE carry trade is back and it's bolstering the Australian dollar, last night helping it to a fresh double-decade high of US90.56?.

Simply put, the carry trade is the practice of borrowing a low-yield currency such as the yen to invest in a high-yield currency such as the Australian dollar.

Investors who were put off by August's sharemarket ructions are back on board.

As expected, Japan's central bank yesterday left interest rates on hold at 0.5 per cent. And Australia's official interest rate is at 6.5 per cent, with the chance for further increases.

"The carry trade is very much back in vogue," said HiFX Australia foreign exchange advisory senior consultant Thomas Averill.

Also helping to lift the dollar were the strong equity market, plump commodity prices and a robust economy.

Mr Averill said the Aussie's phenomenal strength meant it could easily reach parity with the US dollar, although he didn't think that would happen until next year.

"I think parity is a very real proposition," he said. "The previous range for Aussie-US in the last five years was between US50? and US80? and I think the market is now relocating in a range . . . of between US80? and parity."

On the equity market, the S&P/ASX 200 Index rose 33.6 points, or 0.5 per cent, to a record 6771.9.

It was a rocky start, with a negative lead from the US, but rising resource stocks helped turn the market around.

Sally Malay Mining gained 36?, or 7.3 per cent, to $5.27 on news that its nickel reserves were more than expected. And Murchison Metals, which is bidding for rival iron-ore producer Midwest Corporation piled on 31?, or 6 per cent, to $5.49. In third place among the top 200 stocks was Aquarius Platinum, up $2.20, or 5.8 per cent, to $40.

Copper futures, on the London Metal Exchange gained $US120 a tonne, to $US8180 and nickel for three-month delivery was $US795 a tonne higher at $US31,495. Benefiting from a higher oil price was Woodside Petroleum, which jumped $2.03, or 3.9 per cent, to $54.41. West Texas intermediate crude was selling for $US81.30 a barrel in New York.

But the market's biggest gain was by Westralian Gas and Power, with a 144.4 per cent rise. It jumped 19.5? to 33? after the company said its Riddle #13 well had produced oil. "Not so Unlucky #13" was the title of the company's announcement to the Australian Securities Exchange.

In economic news, unemployment fell to a 32-year low of 4.2 per cent. There were fewer jobs created than expected, but the low unemployment level was an indication of Australia's economic strength.

However, a tight labour market can push up wages, promoting inflation. Fewer people - only 14.3 per cent, compared with the previous 18.7 per cent - expect inflation to remain within the Reserve Bank's target band of 2 to 3 per cent.

But HBOS Australia chief economist Alan Langford said that in making its interest rate decision, the Reserve Bank would be guided by the consumer price index for the September quarter, to be released on October 24.

"The CPI would need to be a shocker to trigger a pre-Christmas hike," he said, adding there were too many "ifs" to predict that interest rates would be raised from 6.5 per cent to 6.75 per cent.

© 2007 The Age

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