As I sit and write this week’s Australian dollar piece I am struck by just what an important juncture we currently sit at. I’ll discuss that a little later, but first I wanted to introduce my new stop light for the Australian dollar on a 3 month, 1 month and 1 week basis. This is
Australian Dollar Analysis, News and Forecasts
The Australian dollar, Aussie dollar (AUD) is one the world’s great commodity currencies. Founded in 1966 and floated in 1983 the Aussie “battler” is the 5th most traded currency in the world despite the economy being only the 12th largest by GDP.
The Australian dollar spent much of its first two decades post-float consistently devaluing from the pre-float value of $1.48 US dollars in 1974 to a low of 47 cent in 2001.
Subsequently it broke this huge downtrend with the rise of the Chinese economy and it’s insatiable demand for raw materials – especially those inputs into steel production, iron ore and coking coal – which Australian was endowed with in abundance. It topped this enormous turnaround in 2011 at $1.11 versus the US dollar.
As the super cycle entered decline so too did the Aussie, falling to a low of 68 cents in 2016 and still falling.
However, the Australian dollar had became popular as a small reserve currency holding with foreign central banks. As the value of the currency virtually halved during the bust they kept buying. Because global central banks were fighting both low inflation and oversupply worldwide, many engaged in an overt currency war, deliberately devaluing their currencies to capture or protect global market share of production. This was exacerbated by private sector flows pursuing the “chase for yield”.
This proved a challenge to Australian macroeconomic managers as the commodity bust persisted. Without the lower value, the Australian economy was unable to compete in non-resource sectors. The Reserve Bank of Australia embarked on a series of interest rate cuts, jawboning and, eventually macropudential policy, to bring the Australian dollar to fair value.
There are five drivers to the currency. Australia’s relative position vis-a-vis Chinese and its own growth; interest rate differentials, the strength or otherwise of the US dollar; the terms of trade and sentiment. Each of these tips into any fair value model but over time the primary driver is the terms of trade. The relative strength of each waxes and wanes with wider trends. For instance, during the “tech bubble” of the late nineties the Australian dollar was battered lower by poor sentiment as it was seen as a pre-tech dinosaur. After the “tech bust”, the currency rapidly recovered as sentiment turned favourable for real assets like commodities.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
I had an interesting chat with an old hand in the coal market yesterday. He described how the in the eighties, as Australian coal producers jockeyed to supply Japan, the annual pricing contracts that determined prices and volumes were a like a Presidential cycle. You’d spend a year negotiating, then agree terms, then resume negotiations
Over the past few days trade in markets went from terribly negative to terribly positive. These swings are symptomatic of a market environment dominated by fear. The Australian dollar is no different and has traded in a range of 0.9702 on Monday to 0.9388 Tuesday and then back to 0.9660/70 overnight. In the grand scheme of
It’s RBA day today and while the Bloomberg survey of 21 market economists finds that none think the RBA will cut rates, I reckon it is time they did. The Australian economy is just not as strong as the RBA had thought as recently as June. The inflation outlook is nowhere near as dire as
High Frequency traders (HFT) have been around for a long time. What else were the locals on the SFE back in the floor days and at the establishment of many contracts except HFT? But we never thought of them in the way that many, myself included, think of the HFT guys theses days. No, we
In the Fairfax press today, Ian Verrender has an article about the currency. If you don’t know anything about the topic at hand it is a well written interesting piece. But it slices too thin and rests on an incorrect premise. Verrender says that : Our sharemarket may already have priced in a global recession but
Bloomberg is quoting US Treasury Secretary Tim Geithner this morning as saying that there is an increased: “…threat of cascading default, bank runs and catastrophic risk” from the European crisis. In the context of the Australian dollar, any recoveries you see this week that are unrelated to a resolution of this mess should be kept
The Australian dollar fell precipitously overnight and as I sat down earlier this morning it was actually trading under 0.9700. Remembering that earlier this week the AUD was above 1.03. This is not unexpected to our readers and while I don’t want to turn this into a trading blog it is worth having a look
The FOMC released the decision from its two day meeting early this morning and, as widely anticipated, they announced that they were going to extend the duration of their Treasury holdings in order to try to get the entire interest rate curve lower. They said: …decided today to extend the average maturity of its holdings
But I see offhand no other way to prevent financial transactions disguised as trade – James Tobin In 1972, after the collapse of the Bretton Woods system (where currencies were pegged to the USD, which itself was backed by gold), economist James Tobin proposed a tax on the currency exchange. As he says: The tax
Italy was downgraded by S&P this morning and it has served to underpin the poor price action in European equities overnight, knocked the Dow and S&P futures out of their slumber and whacked the AUD and EUR which look headed a couple of cents lower. I’ve been trying to post for a couple of hours
Hi Everyone…first wrap up for a few weeks after my break and after last nights moves looked very much like risk positions were pared with pretty much everything falling. As I write: the Dow is down 2.69%, S&P 500 similar amounts, European bourses fell between 3-4% the EUR is off 1.67% AUD and NZD are down 1.05% Crude fell
Unusual times call for unusual measures and the move by the Swiss National Bank (SNB) to fix the rate of the Swiss Franc against the Euro this week certainly qualifies. From a Swiss point of view I applaud it wholeheartedly but from a global markets point of view I worry that this move will have
The ABS released their National Accounts aggregates today, with a broad surge in GDP growth since the dismal natural disaster-affected first quarter. The key figures are below. Also important is the revision to the March quarter – up from -1.1% to -0.9%, leaving GDP up 1.38% over the year to June, and per capita GDP
Australian Data The Australian data calendar was dominated by employment and confidence figures this week and unfortunately neither provided any evidence of an improving outlook for the domestic economy with leading indicators actually suggesting we are in for weaker outcomes over the reminder of 2011. Housing finance was also subdued with investors becoming increasingly disenchanted
There is no denying that the AUD, when it wants to, is a volatile beast, when the buyers clear out it simply crashes. Yesterday was a case in point and while the AUD was clearly crashing with other risk assets there was definately a buyers strike after whoever was defending 1.00 (potentially the RBA) stepped
What a day today for markets. Everything was under pressure early and then Ken Rogoff turns up on Bloomberg talking about QE3 and off we go. This could be true or a complete furphy as it is just coincidence that the Fed is due to make an announcement on monetary policy at 2.15pm New York time
The AUD has fallen 2.45% in the first 26 hours of this trading week and currently sits at 1.0170 as I write. Last week I said that I thought the AUD would fall to 0.9700 within two months and I continue to hold that view even though it might happen much sooner than expected. But how does the
In February 2009 after I came back from holidays in Yamba I sat down with a mentor and mapped out how we thought the crisis would manifest over the coming years. I had a massive advantage over many investors and traders in that in my research I had stumbled upon a book written in 1996 by
The AUD has been smashed in the past 36 hours as markets have gone off and fear and uncertainty has risen. From trading 1.1068 earlier in the week it sits at 1.0468 as I write. In many ways it is a resumption of usual transmission for the currency that I believe is the world’s favourite punt. This
The Aussie has broken the major resistance level and this year’s high at 1.1013 today in the wake then the higher than expected CPI. While it hasn’t really gone on with it yet this break, if sustained, is important in the overall context of where the Aussie might be headed. Look at the long term
We have talked often in this space about the idea that the Australian dollar has undergone a rerating over the past year or so and that, as such, will, indeed has, held up better than could have been expected recently given all the turmoil. On Saturday in the Weekly Wrap, I discussed the big positive
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