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.
From Nomura: For global investors, once again the high term rate structure and strong credit ratings of markets like Australia and New Zealand should appear attractive to global money. Significantly too, given Japanese lifers appear to be lowering their hedge ratio for foreign bonds even further, the potential for an acceleration of flows into the
Well, I hope Luci Ellis is happy with her stick figures because that’s all that stands between a grossly over-valued Australian dollar and the economy after the ECB joined the global currency war. From the FT: The European Central Bank lobbed in everything it could – bar quantitative easing –- to counter the threat of
If you’re looking for a reason why the Australian dollar is holding up in the face of the great iron ore crunch, European inflation is a good bet. It dramatically undershot expectations last night From Sober Look: In recent months the ECB has been dismissing reports showing declining inflation in the Eurozone. Officials have been
Nomura asks today if APRA can tighten the screws on the banks: The draft report from APRA released earlier this week is a timely reminder for banks, that lending standards must be maintained, particularly given the rise in house prices in the last year. Moreover, in light of annual wage growth sitting at record lows of 2.6%
From Advisor Perspectives: China’s economy isn’t just slowing down, according to Bass: It’ contracting. While China’s published rates for annual growth are still positive, Bass said the nation’s economic growth was negative from the fourth quarter of 2013 to the first quarter of 2014. That is a result of excessive government spending on unproductive sectors
Over the weekend, AFRTV gave us a forecast of a return to parity for the Australian dollar from Wespac’s Robert Rennie: Regular readers will know I don’t expect any such thing. There are many reasons for why but I’ll confine my comments largely to Rennie’s arguments. The first is that although LNG will raise our
By Leith van Onselen Goldman Sachs is out with a new report forecasting a fall in the Australian Dollar to around $US0.85 over the coming year on account of the weakening economy, ongoing falls in the terms-of-trade, and a pick-up in US growth: Relative growth dynamics between Australia and the US appear to be shifting
From Credit Suisse: AUDUSD continues to threaten a top below .9202. AUDUSD held key support at .9205/02 – the April/May low – and staged a bounce. However, with the market still trading below the 21-day average at .9308, the immediate risk remains seen as lower. Our bearish bias leans towards aretest of key support at
Recently I posted that MB’s five drivers model for the Australian dollar was pointing lower. The dollar broke lower last night and appears biased for more. The five drivers are: interest rate differentials; global and Australian growth (more recently this has become more nuanced for the Aussie to be more about Chinese growth); investor sentiment
Guy Debelle is on the hustings today giving a speech about why changing capital flows will bring down the dollar. It’s too long to post but has some great charts. Here’s the gist: Given that changes in gross inflows to the banking, resources and government sectors have had a significant influence on changes in the
Last night the Australian dollar fell to it’s lowest point in two weeks: The falls were’t large but they were broad, impressively so on the crosses: That’s a hint that the iron ore and China weakness we’re seeing is finally undermining the currency. Aside from the structural reasons that we’ve often discussed for why the
David Bassanese takes up the Australian dollar baton today and does a good job of it: The resilience of the Australian dollar in recent months has been surprising, particularly given export commodity prices have resumed their slide. Only more surprising is the fact that the Reserve Bank of Australia has gone relatively quiet on the jawboning
From the SMH blog: Commonwealth Bank forecasts maintain the Reserve Bank is on track to raise interest rates in the fourth-quarter of 2014, and again in the first-quarter of 2015. The beginning of an upward cycle in interest rates will ensure fresh support for the currency and could put it on track to repeat parity against
The Aussie if flying this afternoon, at a four week high, not on the Budget, but building expectations of European QE after the WSJ published this today: Germany’s central bank is willing to back an array of stimulus measures by the European Central Bank next month if needed to fight unacceptably low inflation, underscoring the
From the SMH blog: Sydney may not be as expensive as it was a year ago by global standards, thanks to a weaker local currency, but Australia is still one of the world’s priciest economies, even if dating just got more affordable. It costs an average of $US104 ($A111.08) for two people to go out on
From the SMH: One of two men charged with insider trading on the basis of advance knowledge of sensitive government statistics had a field day on March 13, police say. That was the day Lukas James Kamay allegedly made more than $2.5 million after the release of surprisingly positive jobs data. To generate a profit
Over the weekend this story came to light: In one of the most serious insider trading cases in the nation’s history, the Australian Federal Police allege 26-year-old Lukas Kamay, an employee with National Australia Bank, offered up to $60,000 to 24-year-old ABS analyst Christopher Hill as a bribe to provide market-sensitive data before publication. Mr
If it’s not one major funding currency then it’s another. Earlier this week the US dollar was smashed on the prospects of extended US easing. Overnight it reversed completely and the euro was hammered as the ECB gave bold hints of a resumption of money printing in June. It doesn’t seem to matter who wins
You can’t keep a good battler down and the Aussie is refusing to buckle. A benign central bank, war in Ukraine, Chinese property bust and tumbling iron ore price is just not enough! More seriously, the source of local currency strength is easy pinpoint today. It is weakness on the on the other side of
This call is a bit early but MB’s five drivers model for the Australian dollar is pointing lower. The five drivers are: interest rate differentials; global and Australian growth (more recently this has become more nuanced for the Aussie to be more about Chinese growth); investor sentiment and technicals; and the US dollar For the
The People’s Bank of China (PBOC) has set the yuan reference rate at 6.1580 versus 6.1556 yesterday. No liquidity drainage today but SHIBOR is still climbing: The chart remains very sharply up for US/CNY and is closing swiftly on the erasure of two years of appreciation: If there are any CNY longs left, they’re getting
The Dalian Commodity Exchange is open and iron ore futures have resumed their slide, down another 1% at the open with a small rebound. Rebar futures have held up. Major iron ore miners are following Dalian down, off 1-2% and dragging the ASX into the red. More importantly, the dollar seems to also being dragged
BofAML noted today that forex volatility has fallen again to record lows: The persistent drop in rates and FX vols has been the most prominent market trend since the Fed tapering scare last summer. In most cases, realized volatility is even lower than implied. Last time vols were so low, East Asia, Russia or the
From Credit Suisse: Extension below .9253/51 should keep the bias lower to test early April low at .9205 next. AUDUSD has bounced initially at price support at .9253. Resistance at .9302 needs to cap keep the immediate biaslower for a clear break of .9253 to challenge the .9205 early April low next. While this should
This is from late last week but is worth repeating, Goldman’s technical analyst has turned bearish on the Australian dollar (from memory they have an 80 cents year end target) from ForexLive:
The basic assumption in Australian monetary policy right now is that the US recovery will push up interest rates in the medium term and that will, in turn, close the yield spread between Australian assets and those in the US, dragging down the Australian dollar. This forecast relies largely upon the expectations of the US
China Securities Journal editorial via ForexLive: Recent yuan depreciation will provide a cushion and leave room for future increases should China face intensive capital inflows again if both Europe and Japan expand their quantitative easing programs. Said the Chinese economy can’t cope with any more sharp appreciation because of weak exports so depreciation provides a
The Aussie is still falling now, down a cent on the day: This looks to me a pretty decent move in the making. After all, if there’s no inflation then there’s no expanded carry coming. On the downside, there are few serious supports before 92 cents: It would probably take more bad news or a
From the AFR: Japan’s $1.26 trillion Government Pension and Investment Fund this week announced changes to its investment committee that would fast-track plans to shift money out of Japanese government bonds (JGBs) into equities and foreign bonds. …GPIF, which is roughly equal in value to Australia’s institutionally managed superannuation assets, holds more than half its
From the AFR: Empirically, the Australian currency tends to weaken when commodity prices fall or when domestic interest rates fall relative to those in the United States. It is reasonable to expect the fall in commodity prices since 2011 would weaken the Australian dollar. Similarly the announcement of tapering or an end of quantitative easing
