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For months, the Australian Dollar has maintained a brave face, holding above parity amidst continued calls of confidence from the Reserve Bank of Australia. But now it seems change may finally be coming, preceding a downturn in the Australian investment environment. Falling exports, a decrease in mining revenue and quivering interest rates paint a stark picture for the Aussie currency against the US.
After an indulgent period of booming commodity prices and low unemployment, the waistline of any national economy would begin to expand. A declining currency is often a telltale sign of such indulgence coming to an end; and that change may be closer than you think.
RBA Governor, Glenn Stevens this week hinted at the possibility of further interest rate cuts in coming months, while Bloomberg suggested the Aussie Dollar could return to parity by 31 March, 2013. But there is every chance that the dollar could reach parity by January, in light of the improving investment market in North America and the flight away from Australian currency due to lower interest rate yields.
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America returns
It’s no secret that the US economy is outperforming. Although still far from healthy, leading indicators such as higher earnings expectations and GDP growth in the US are beginning to point upward. These improving investment fundamentals will accelerate the flow of funds into America, further strengthening the US dollar against the Aussie.
As the global base currency, every major denomination is paired to the US Dollar. It’s a push-pull relationship and a decrease in Australian economic output, falling interest rates and growing unemployment will apply pressure to the already overweight Aussie dollar.
The existing ’carry-trade’ (borrowing in low-interest economies and investing in high-interest economies) led to the largest flow of currency into Australia in decades, buoyed by some of the highest interest rates in the developed world. Sovereign risk was minimal and Australia became a very attractive place for investors. This will begin to unwind and, as the RBA continues to ease monetary policy, the future of the Australian economy looks increasingly perilous.
With 61% of the world’s currency reserves held US Dollars, the tables are heavily weighted in America’s favour. The carry-trade has only just begun in the US and there is every indication that the US Dollar is beginning to gain traction.
Stay Ahead of The Game,
Lachlan McPherson
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