Why the Aussie dollar is flying high

Mon, 13 Feb 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/aussie-dollar-where-art-thou-035132180.html 

-------------------------------------------------------------

Why the Aussie dollar is flying high

The Australian dollar has been rising strongly over the past six months and not just against the US dollar where this morning it is hovering just under 78 cents.

The Aussie dollar is also buying over 0.72 euros, the highest level it has been since early 2015 and is up some 10 per cent since May last year. It is also strong against the British pound, Japanese yen and Canadian dollar. In simple terms, the Aussie dollar is flying.
The reasons for the strength are clear.

Importantly, Australia has some of the highest interest rates in the industrialised world which means global investors are keen to pick up a positive yield with their Australian holdings versus those in other countries. With the RBA signaling that is has no plans to cut interest rates and rates in Europe, Japan and Canada unlikely to be hiked any time soon, the Australian dollar is likely to remain attractive for some time.

The other vital element supporting the Australian dollar has been the surge in commodity prices over the past year or so and the fact that this is showing up in a spectacular turnaround in the international trade balance from sizable deficits to what was a record monthly trade surplus in December.

With Australia’s exports dominated by bulk commodities, when the price of these commodities increases, the companies that extract the iron ore, coal and other materials enjoy what is a windfall gain in their earnings. A number of things accompany this. As foreign currency export receipts rise, these firms need to convert a large proportion of these proceeds into Australian dollars – this simply increases demand and pushes the dollar higher.

It also means that there is an income boost for the overall economy. This improves general conditions, sees a surge in tax revenue to the government and the budget position is improved. At a time when the triple-A credit rating is hanging by a thread and as a result there was concern that a credit downgrade would undermine the Australian dollar, this fortuitous but clearly good news on the budget materially reduces the chances of a credit downgrade, which improves confidence in Australia and with that the currency moves higher.

Forecasting moves in the Aussie dollar is a tough gig. That said, there are reasons to think that it is now fully valued – in other words, it is due for something of a fall.

The market is under-estimating the risks of an RBA rate cut given the low inflation climate, relatively high unemployment and record low wages. If at any stage, the market comes to price in a possible further rate cut, the dollar would come under pressure,

If, as appears likely, the commodity price rally runs out of steam (coal prices have already dropped for their recent highs) , then other key support for the Aussie dollar reverses.
It seems a track back below 75 US cents could quickly emerge, with similar or larger falls against the euro, British pound and Canadian dollar.

comments powered by Disqus

THE LATEST FROM THE KOUK

Employment - the odd one out or is the economy booming?

Thu, 19 Oct 2017

I am reluctant to bag and slag the employment data, because it is all we have when looking at the health of the labour market. But there are a few quirky bits and bobs in the news of the wonderful run of job creation over the past year.

Employment rose by a remarkably strong 3.1 per cent in the year to September, a fabulous result.

But, and it is a big but, the results are at odds with just about every other indicator in the economy. EIther they are misleading or the employment data are misleading.

One way to check it to have a look at the economy the last time annual growth in employment was above 3 per cent. This takes us to the period around 2007 and into early 2008.

In 2007, annual real GDP growth was generally around 4 to 5 per cent, as you would expect with such jobs growth. The economy was on fire!  In 2008, the CPI surged by over 4 per cent which is again as you would expect given the boom in employment. The RBA was hiking rates at an agressive pace, with the official cash rate hitting a stonking 7.25 per cent in 2008. Wow! 

What bubble? The financial sector is fighting fit

Tue, 17 Oct 2017

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/1897318-045821149.html 

 ---------------------------------------------------------

What bubble? The financial sector is fighting fit

Australia’s banking sector is in peak health and the household sector is having few if any problems managing its debt.

This is the good news from the Reserve Bank of Australia Financial Stability Report which effectively put the kybosh on the fear-mongers who continue to forecast a crisis in household debt, a crash in house prices and turmoil in the financial system and more specifically, the banks.

The key conclusion from the RBA was that “the financial system is in a strong position and its resilience to adverse shocks has increased over recent years.”

These are strong and direct words from the normally cautious RBA.

It also noted that the bank’s non-performing loans (bad debts in other words) “remain low” and bank profitability “is high”, which are the key indicators of financial stability and strength. The RBA went as far to say that “the banks also have ample access to a range of funding sources at a lower cost than a decade ago” which is fundamental to the functioning of the financial system. Nothing was presented that indicated current problems in the financial sector.

The RBA assessment can be tested from the markets, specifically bank share prices. Most evidently, bank share prices remain strong as the investment community continues to place its money where its mouth is when determining actual performance and even risks when allocating investment funds.