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Australian dollar edges higher ahead of Greece crisis summit

Mark Mulligan
Mark MulliganWorld editor
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The Australian dollar edged higher on Monday, with an absence of domestic data and jitters over Greece keeping volumes low as traders consolidated positions.

In late local trade the Aussie was fetching US77.90¢, compared with US77.68¢ at the same time on Friday. The currency's intraday low on Monday was US77.61¢.

Currency markets had also been subdued in overseas trade late on Friday and early Saturday local time, despite mounting pressure on creditors and Greek government officials over a bailout accord. The impasse, however, has hit credit markets.

"Understandable jitters over Greece, including various meeting dates that have come and gone, have seen some debt issues being been pulled," said National Australia Bank senior economist David de Garis.

"But other markets – equities, currencies and bond markets – have not been affected to any material degree," he said.

Negotiations were set to resume late on Monday local time at a specially-convened summit in Brussels, however, with a continuation of the impasse likely to have a growing impact on currency markets.

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"The tipping point for Greece to pay its creditors is rapidly approaching, and a deal is proving difficult to come by," NAB said in a separate note on Monday.

"It may be that one is forthcoming, but if not, we can expect a rapid rise in risk aversion.

"That remains a significant downside risk for the Australian dollar," the bank said.

Greece has until June 30 to secure a deal or risks default on €1.5 billion due to the International Monetary Fund.

Also, the bailout program with its European creditors expires on that day.

"It seems increasingly unlikely that Greece will reach an agreement before the deadline that is satisfactory to its creditors," said Australia and New Zealand Banking group senior economist Tom Kenny.

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However, if Greece does secure a deal to avert default, and markets refocus, the Australian dollar could start look too weak for its fundamentals, says NAB.

The bank says that based on interest rate differentials, commodity prices, market risk and gold prices, the local unit "remains undervalued".

"NAB's long-term valuation tool shows that the Australian dollar, on a real trade-weighted basis, is indeed close to fair value," it said.

"These factors suggest that there are fewer forces pulling the dollar strongly lower from these levels."

The US Federal Reserve's current caution on the timing and intensity of monetary tightening is also a factor here.

BlackRock sees it differently, however.

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The world's largest asset-manager forecasts a drop in the Aussie to below US70¢ next year as a struggling economy forces the Reserve Bank of Australia to reduce interest rates by as much as a further 50 basis points.

Head of Australian fixed income Stephen Miller says while the RBA is a "reluctant cutter", weak business capital spending will probably push policy makers into lowering the cash rate by a quarter point, from its current 2 per cent, in either September or October.

He says the RBA could could even cut again in 2016 if the situation failed to improve.

"The economy has some really challenging headwinds," Mr Miller told Bloomberg.

"Seventy US cents: I still see that as a reasonable target by the end of this year and I think it probably goes lower in 2016," he said.

Mark Mulligan is the world editor and a former markets and economics writer. He was a Financial Times correspondent. Connect with Mark on Twitter. Email Mark at mark.mulligan@afr.com.au

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