Latin America is a large commodity producer and competitor to Australian mining and agriculture. But why let that worry you when they want to buy your currency? From the AFR: The Australian dollar’s popularity with investors and offshore central banks shows little sign of slowing, with new data showing increased appetite from emerging markets for AAA-rated
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.
There is a cracking story in the Wall Street Journal overnight about the Australian dollar and Caterpillar and their correlation by Stephen Bernard and Vincent Cignarella. In it they say, The 30-day correlation between Caterpillar stock and the Australian dollar-U.S. dollar exchange rate is currently 0.85, where 0 means there is absolutely no discernable pattern
James Rickards’ recent book, Currency Wars: The making of the next global crisis, is worth reading if you are interested in a history lesson of international monetary politics. As you can probably tell from the title, the book’s central thesis is that currency values are primarily the result of domestic and internationally coordinated policy decisions,
From the AFR: The finance secretary of the Philippines has confirmed his central bank is buying Australian dollars, despite Reserve Bank of Australia documents released this week which said the island nation was not a buyer. “The Australian dollar is part of it and an increasing part of it,” Finance Secretary Cesar Purisima toldThe Australian
According to the AFR, the RBA is in the dark when it comes to which central banks are buying Australian dollars. From yesterday’s FOI release: Some of the buyers, including Germany and Russia, were apparently identified from media sources. …Brazil, Poland, Hong Kong and South Korea are among other central banks listed as buyers. Peru,
Whilst the RBA and politicians dance around addressing the strength of the Australian dollar, crushing many productive sectors of the economy, APRA and Mega Bank use policies that pass massive risk to the taxpayer and inflate the level of the AUD. How so? The traditional and “official” view is that if a financial institution or
Missed this earlier from the SMH: The Reserve Bank of Australia says the dollar is held by as many as 23 central banks from Brasilia to Moscow, documents showed. The central banks of Brazil, Russia, Germany, Hong Kong, South Korea, Poland, Sweden, and Switzerland are among 15 economies that hold the Australian currency, according to
One of the more strident ideas that have put forth by Australia’s chorus of economic elites – which includes the Government, RBA and senior media commentators – is that there is nothing that we can do about the high Australian dollar. This is poppycock. Let me explain. The Australian dollar is rising once more because
From The Australian: THE soaring Australian dollar is poised to tumble as lower interest rates, an escalating US fiscal crisis, and more Federal Reserve asset purchases conspire to push the high-yielding currency significantly below parity against the greenback. That’s according to strategists at investment bank HSBC, who say the so-called Aussie may sink to as
There’s an institutional research report about the Australian dollar that has gained a lot of attention around the world in the past few days. It is by a boutique insto research firm called Variant Perception. Called “Australia: The unlucky country, it argues: A substantially weaker currency in Australia is inevitable given fundamental factors. Oversized banks
Cross-posted with permission from Interest.co.nz. By Alex Tarrant Australian economist Warwick McKibbin says he was surprised by the reaction to an opinion piece arguing the Reserve Bank of Australia could take upward pressure off the currency by printing Australian dollars and buying foreign exchange to offset foreign central bank purchases of the currency. Speaking to
The Aussie Dollar has been the darling of the currency landscape for the past two years and its rise has rewarded well those who have ploughed their money into it. And as other risk markets swoon, just like a teenager after his first kiss, the love affair of forex traders, global portfolio managers and central
From AAP: Former treasury boss Ken Henry has told business the Australian dollar is likely to remain high for the foreseeable future. Dr Henry told the Australian Industry Group forum in Canberra it would not be prudent to bank on an early sizeable depreciation in the exchange rate. “There is no silver bullet that is
That’s the argument made by many MB commenters and today by Westpac’s Huw Mackay (of Phat Dragon fame) at the AFR. …the most recent balance of payments data show that gross foreign purchases of Australian assets were 42 per cent debt and 58 per cent equity. Westpac proprietary customer data shows that foreign sovereign purchases
FT Alphaville last night wrote the following: But the strength of the dollar is still a cause for concern, even, it seems, for the RBA. Following Tuesday’s decision to leave the official cash rate on hold at 3.5 per cent, it noted the exchange rate had “remained high, despite the observed decline in the terms of trade and
From the AFR: Foreign central bank appetite could be adding up to US15¢ to the value of the Australian dollar according to one strategist, as the market awaits commentary from the Reserve Bank of Australia on the high dollar following its rates meeting on Tuesday. Morgan Stanley strategist Gerard Minack wrote in a note to
There are two points worth noting about Warwick McKibbin’s persistent call for the RBA to control the dollar in today’s AFR. The first and greater point is that: It is clear that it is better to take the appreciation of the real exchange rate caused by a commodities boom through a stronger currency rather than
Australia’s policy makers seem to have been hiding in the trenches while the global currency war is being fought around them. Although here at MB we have discussed the high dollar at length, only now that former RBA Board member Warwick McKibbin has suggested that direct intervention is justified by policy changes abroad, has the
Here’s something MB missed yesterday (as did the entire Australian press) and may in part have triggered the McKibbin story overnight. From Alphaville: SYDNEY-Officials within the foreign-exchange arm of China’s central bank recently met Australian regional governments to discuss buying their bonds, people familiar with the matter said. The securities – known as semi-government –
By David Llewellyn-Smith Thank heavens. Australia’s best free-thinking economist, Warwick McKibbin, has finally broken the Canberra consensus and urged the RBA to sell the dollar. From the AFR: Former Reserve Bank of Australia board member Warwick McKibbin is urging the central bank to intervene in currency markets to limit the strength of the dollar, suggesting
Is that a small dump in the Aussie on the PMI? Nah, just a general risk off move.
A few months ago I investigated the growing the divergence between a weak thermal coal price and strong iron ore as well as coking coal commodity markets. The divergence continues but the relative strength has reversed. Here are the overnight prices: The bounce from the recent lows for thermal coal is not yet convincing: Thermal
From the WSJ: Germany’s Bundesbank is expected to begin adding Australian dollar assets such as government bonds to its foreign reserve holdings before the end of September, bankers say. The decision, which follows a two-and-a-half year review by the Bundesbank, adds to a wave of central bank demand for Australian-dollar exposures that has swelled over
In more poor news, the AFR reports that: The Czech Republic central bank is buying Australian dollars for inclusion in its foreign exchange reserves. …According to one trader, the Czech National Bank has been buying Australian dollars in the 2012 calendar year of amounts that add up to between $US500 million and $US1 billion. Let’s
The great conundrum of FX markets over the past year or two has been the resilience of the Euro in the face of all the problems that have engulfed the Eurozone, seemingly threatening its very existence. We know that European banks have been repatriating money and we know that both legs of Chairman Bernanke’s quantitative easing
Find below a fascinating new note from Westpac’s Huw Mackay (Phat Dragon), who has a brain the size of a planet, on why the Australian dollar has shown continued resilience, even though, thankfully, he does not buy into the “safe haven” tripe: We principally highlight the economy’s improved external financing position (both in terms of scale
Last night’s price action in the euro and the US dollar suggested, quite rightly, that the market remains worried about Spain. Indeed the Spanish 10 year yield closed at 7.16% and the euro fell back from the Asian highs. The Australian dollar on the other hand has been holding in well and sits just below
You might be asking the question: how can the Australian dollar be back above parity after a night where Spanish and Italian yields blew out and only a couple of days before the Greek election? Anyone who tells you that this is because the Aussie dollar is a safe haven should faded quick smart. The