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 the AFR: The Russian central bank is increasing its Australian-dollar purchases by at least $20 billion and could be seeking to allocate up to 10 per cent of its reserves, making it harder for the Reserve Bank to push down the currency. A source familiar with the Bank of Russia said it had already
From Bloomberg comes the news that the Swiss are buying Australian dollars as a part of an explicit mercantilist strategy: The Swiss central bank pledged to keep defending its franc cap and left borrowing costs at zero to protect the economy from “exceptionally high” risks as the euro area’s crisis intensifies. …The central bank, which
From the WSJ: Azerbaijan, the Caspian nation best known for its caviar and petroleum, is buying Australian government bonds, joining a growing list of sovereign investors acquiring debt Down Under in a trend that has seen the Aussie dollar labeled a potential safe-haven currency by the International Monetary Fund. The former Soviet republic’s US$33 billion
I was struck by this chart from Merrill Lynch this moring. Clearly the Australian dollar has not only decoupled from the economy and commodity cycle, it has also gone its own way versus the other commodity currencies, and how! As an experiment, here are the key metrics of each of these commodity exporters. First, interest
Morgan Stanley sees the Australian dollar substantially lower in revised forecasts for 2013: We remain bearish AUD, and note that despite a fairly robust set of Chinese data over last weekend, AUD failed to make any substantial gains. Indeed, the end of the commodity super cycle and a slowing domestic economy are likely to weigh
It’s hard not to find a story about the Australian dollar over the past 12-18 hours without some sort of reference to the fact that the IMF is “considering” listing the Australian and Canadian dollars as reserve assets. The media reported the news the way that the local press reports the victory of the home
From the AFR: The IMF is considering classifying the $A, and also the Canadian dollar, as reserve currencies, alongside US dollars, euros, British pounds, Japanese yen and Swiss francs. The move was flagged in the IMF’s recent Composition of Foreign Exchange Reserves (CoFER), which for the first time included line items for those two currencies,
From the AFR: Further evidence that the Reserve Bank of Australia may be passively intervening in currency markets by selling Australian dollars off-market has been released by the central bank on Thursday morning. The total volume of “other outright” transactions, which take place between the RBA and other central banks and overseas institutions, reached $483
From the AFR: China’s central bank governor has indicated a long planned currency deal with Australia is set to go ahead, as it would provide greater stability to the growing trade relationship. The head of the People’s Bank of China, Zhou Xiaochuan, said direct trading of the yuan and Australian dollar was a “natural outcome”,
The fruits of our blinkered and ideological commitment to a strong dollar really are beginning to show. From the AFR: The Russian central bank has stepped up its purchase of Australian dollars, helping to explain the currency’s persistent strength despite recent interest rate cuts. The Central Bank of Russia has reportedly been buying Australian dollars
From the AFR: The Reserve Bank of Australia could already be printing Australian dollars and selling them directly to foreign central banks in an effort to reduce buying pressure on the currency, according to investment bank UBS. …In the week ending October 31, $2.1 billion was deposited, which is the highest weekly inflow since May
A picture paints a thousand words…
Jonathon Shapiro of the AFR has a disconcerting opinion article today on the demand among foreign investors for Australian debt. He recounts a tale of foreign guests of the Commonwealth Bank touring Sydney’s The Rocks to listen to the RBA’s Phil Lowe over dinner: “…from China, Russia, Japan, Ukraine, Indonesia, Sri Lanka and beyond were not
FTAlphaville has run two excellent posts in the past day on the RBA’s passive accumulation of foreign reserves. Find both cross-posted below. The RBA – leaning against the wind Is the Reserve Bank of Australia intervening in the market to hold down the remarkably resilient Aussie dollar? That’s the question commentators and economists are asking themselves
Stock markets are under pressure again this morning and back toward the bottom of recent ranges as concerns of the global economy remain top of mind. Trade data from Japan yesterday showing that exports fell 10.3% in September was worse than the punditry’s already jaundiced expectations of a fall of 9.9%. But it seems to
From the AFR: If you haven’t read Reminiscence of a Stock Operator, don’t bother showing up to a job interview with Mike Novogratz, the fabled co-founder of $47 billion New York-based hedge fund giant, Fortress Investment Group. The novel about an early Wall Street trader is regarded by many of the top hedge funds as a
Find below an interesting video and a great summary of the current situation from Bloomberg asking if the Australian dollar is on borrowed time. I agree with the points being made in the clip and have thought for some time that the worm has turned for the Aussie as perceptions about Australia and the
Given the pounding the Australian dollar has taken over the past two day’s data, it is holding up pretty well against the US dollar. But a closer look suggests that the Battler is swooning a little more than appearances. I am pleased to observe that against many of the crosses the currency is weakening consistently.
Go you good thing!
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
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
