Soaring Aussie dollar is heading for a bout of vertigo
Feb 06, 2012
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Many markets and currencies have had a strong start to the year. But the Australian dollar’s performance has been especially impressive. The Aussie has gained almost 10% against its US counterpart in two months.
Against sterling, it has reached a 27-year high. On a trade-weighted basis against a basket of major trading partners’ currencies – it remains close to the 20-year high seen last year.
The Aussie always benefits when global risk appetite recovers, but even allowing for the recent general improvement in investor sentiment, it is trading “at levels that are at odds with underlying economic forces”, says Neil Hume in the FT. “These forces are China and a more uncertain outlook for global economic growth.”
As a major commodities exporter, Australia depends on China’s appetite for raw materials. With the Middle Kingdom now slowing and in danger of a hard landing, the prospects for commodities are deteriorating.
It’s not just China: all emerging markets are cooling. More than 70% of Australia’s exports go to Asia, where recent interest rate rises are taking their toll. Paul Bloxham of Australia and New Zealand Bank notes that growth in Australia’s main trading partners is expected to have eased from 4.6% to 3.2% in 2011.
Recent domestic data have also done the bulls “no favours”, says FxPro.com. Payrolls declined for a second successive month in December, so in 2011, “there was essentially no employment growth”. What’s more, air is now beginning to hiss out of Australia’s housing bubble. Prices had soared six-fold in the past 25 years, compared to a four-fold rise in Britain between 1986 and 2007.
No wonder Australia’s indebted consumers are loath to spend. The next moves in interest rates will be down. That will reduce the yield on Australian assets and undermine the currency’s appeal. The Aussie is due to suffer a “bout of vertigo”, says FxPro.com. Bloxham sees scope for a slide back to $0.95 US dollars; one Aussie now buys $1.06 greenbacks. Morgan Stanley thinks it could touch $0.90 by the third quarter of 2012.
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