Aussie Reaches 18 Year High Against The Dollar - The Sky Is the Limit?

The Australian stock exchange was the only disappointment today, as falling metal prices and worse than anticipated performance of few large Australian corporations put strong downward pressure on equities, which closed with a 4.4 point loss at 6382.6. Meanwhile, carry traders, largely Japanese pension funds, have been dominating the FX and bond markets, pushing the Aussie to its 18 year high against the US dollar and exerting downward pressure on 10-yr yields.

[B]Strong economy boosts manufacturing - data[/B] - The Australian Industry Group Pricewaterhouse Coopers Survey of Australian Manufacturing showed that the production of domestic firms rose to 12 percent from 6 in the first quarter. This marked a fourth consecutive quarter of growth of manufacturing activity driven by strong domestic demand and economic growth. The transport equipment sector saw largest growth gains, best since June 2004. However, as the Aussie gets stronger businesses predict a tougher second half of the year. [I]Source: Herald Sun[/I],21985,21948991-5012062,00.html
[B]Cold shoulder mystifies FMG[/B] - Fortescue Metal Group chairman Herb Elliott is bewildered as to why Australian money is not supporting the company?s project to start exploration of iron ore at the Pilbara, breaking the current duopoly in the region. Fortescue secured all of the funding it was hoping to get from high-yield Asian, European and US bond markets and was hoping to raise the remaining $1 billion at home. The company is known for struggling with its cost, and so the Australian fund managers did not put their money into the company?s equity, despite its spike from 30c to over $40 in just four years. UBS Investment bank is rumored to be looking into covering Fortescue and the top management remains optimistic about the project. Such disparity in the sentiment between domestic and international investors is puzzling if not suspicious. [I]Source: The Australian
[B]Iluka may be ripe for takeover[/B] - The mineral sands miner appears to be an attractive takeover target with its share price rising recently. Iluka has strategic value as word?s dominant producer of zircon used for glazing in ceramics. It has been an attractive target for investors recently, with large individual investors holding 7.5% of its equity, a US hedge fund Osparie has 8% and M&G Investment Management acquired over 17%. In the past five days, Iluka has risen 14%. The zircon markets is rather small, which makes both Rio Tinto and BHP mining giants contemplate as to whether they should take over Iluka. [I]Source: The Australian[/I],20867,21946270-5005200,00.html
[B]Caltex sees profits soaring[/B] - Due to strong refining margins and higher production and sales volumes, fuel giant Caltex Australia is expecting to make between $235 and $255 after tax profit. The rise of crude oil price as well as widening global gap between the supply and demand for petroleum contributed heavily. [I]Source: Herald Sun[/I]
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Despite the lack of economic data, the Aussie continued to climb today. It took a little hit due to strong leading economic indicators boosting US dollar?s strength yesterday, but quickly regained strength… It took another small hit this morning as the base metal prices fell, but resumed its climb later in the day. The Japanese pension funds that are selling yen for high interest rate currencies were named the primary drivers of the strengthening Australian currency. The Aussie broke the 0.8475 resistance line at about 2 AM EST and set a 17 year record against the US dollar. With no particularly significant market moving announcements on the economic calendar for the next week, carry traders may continue to dominate the market.

[U][B]Stock Market[/B][/U]
The Australian exchange fell for the second day in the row, hurt by the falling prices for base metals. Furthermore, Caltex Australia despite posting strong growth figures missed expectations of some analysts and fell by 11.3%. Brambles Industries fell after UBS reduced its grading of the company due to weak sales figures in Europe. The words? biggest supplier of pallets lost 2% as a result. Despite news that missed people?s expectations, ASX still saw some bullish support and recovered its stance slightly, closing the day with a very modest 4.4 point decline at 6382.6

[U][B]Bond Market[/B][/U]
The Australian 10-yr yield opened higher and continued to rise in the morning, seeing competition from US as well as domestic bonds. Today, it was ANZ, nations third largest bank that sold A$225 ($191 million) worth of bonds backed by local trade receivables to the market. However, the unprecedented demand for the Aussie bonds by the international carry traders put downwards pressure on bonds yields and the 10-yr saw a decline during the rest of the day, ending at 6.263 or down just 0.6 of a basis point.