Punchdrunk Aussie takes a breather.......

Tuesday 4th August 2015

Punchdrunk Aussie takes a breather.......

ref "Trading Post" by Jamie Chisholm, The Financial Times, p.27

It may come as a surprise to some but at this precise point in time the Australian Dollar is judged to be the 5th most traded currency in the world. Australia is always interesting for the role it plays as a benchmark for all countries in which the economy is closely linked to the price of commodities (Canada, New Zealand etc) . It also acts as a window on the fortunes of nations in SE Asia, some of which share a position as commodity producers whilst others, as consumers, share close trading links with the Aussies.

No country is more dependent on the health of China's economy than Australia. When China's seemingly limitless demand for  Australian raw materials (iron ore, coal, copper, zinc etc, not to mention agriculturals) pushed prices to giddy heights, unsurprisingly the Aussie economy and its currency went with them. In mid-2011, the AUS$ hit US$1.10. Yesterday, its price was US$ 0.73, near 6yr lows. No illustration of how the Chinese slowdown has affected Australia could be starker.

It's not as though Australia's political leaders and its central bank are unaware of the urgent need for the economy to diversify out of its reliance on mining and minerals, and of the need for monetary easing both to encourage investment and to boost exports through a cheaper currency. The Reserve Bank of Australia (RBA) has combined a series of rate cuts with regular utterances on the desirability of a weaker AUS$. The question is, how low do they want it to go ?

Announcing its latest policy decision this morning, the RBA left interest rates unchanged at 2.0% (which wasn't a surprise) but for the first time in a while made no mention of the need for a still weaker exchange rate (which was). The Aussie rallied 1c on the back of it all. It's a stretch to conclude that the RBA is happy with things the way they are. Futures markets are suggesting a further 25 basis point cut in rates by March, and with US rates due to rise this would seem to point to continued falls for the Aussie. But the RBA will, at least to some degree, have to consider other things in its monetary policy decisions --  such as the possibility of a nasty property bubble, for example. And with the number of speculators long US / short AUS approaching technically "oversold" levels, snapbacks are always possible. Those speculators will be nervously awaiting the next clue from the RBA, whatever the current fundamentals seem to say.