9:51 am - Market Outlook by Bill Wermine

Dear Traders,

Many of you who invested in Man are concerned about the Australian Dollar. We should be as the our capital guarantee is in AUD government bonds and the Man funds are denominated in AUD.

Tan Teng Boo, CEO of I Capital who has a solid track record as a fund manager and analyst shared his AUD research in the latest issue of I Capital and it may answer your concerns about the AUD versus the RM.

The foreign exchange rate between the Ringgit and the AUD is determined substantially by 2 key factors.

The first is Malaysia's political and economic future while the second is Australia's economic prospects.

1st quarter GDP in Malaysia was a steep 6.2 % contraction and the 2nd quarter should also show contraction. Positive growth should emerge in the 4th quarter as well as the Australia, China, Japan and most Asian economies.

Short term recovery should not be a problem; what is the problem is long term growth which means sustained productivity gains- this might be difficult as the Malaysian economy needs to urgently implement many reforms to restructure the Malaysian economy. There are many uncertainties here. Australia does not face these problems.

At the same time the economic prospects for Australia look bright. The long term prospects of this huge country are tied to the longer-term prospects of China and the rest of Asia. The key drivers of recovery in the short term are the relatively resilient Australian economy, a credit crunch which is much less severe, the ability to undertake fiscal stimulus, an undersupplied hou sing market and the commodities demand from China and the rest of Asia.

Although China has been expanding rapidly for the last 30 years, she still has a long way to go to catch up with the developed economies. There is huge potential demand for refigerators that remains untapped for the 100s of millions of Chinese and that will take plenty of iron ore and coal. A torrent of demand for commodities will be unleashed. Australia who is physically nearer to China compared to Brazil or Canada will be the competitive supplier of these commodities.

Over the course the AUD should be a net gainer. Since 1983 the RM has traded between 1.60 to 3.10. The trend over the last 25 years is up for the AUD/RM cross. Yes there are gut wrenching corrections as we have just experienced but the up trend is clearly defined. Relative weaking periods are shorter than the strengthening periods. Who said it is easy ?

In the current US Dollar collapse and the rush to commodities including gold and crude oil coupled with China, Russia, Brazil and Japan cutting back their purchases of US Treasury bonds there is a chance the AUD will break out above the 3.10 rate and move into unchartered waters.

If this happens, you who hold Man AUD Diversified will be very happy.

Also for those who hold KLSE plantation, rubber and commodity shares as well as long CPO futures should also benefit.
The rich diversity of natural resources in Malaysia will always support the RM versus most world currencies including the US Dollar/ UK Pound/ Euro and Yen. The AUD and SGD should outperform based on my currnent trends.

I hope this answers the many questions I have been asked about the AUD/ RM exchange rate.

If you should have any others please feel free to ask me.

Have a good week,
Bill