The rise and rise of the $AUD

Posted July 2009

Wow what a ride! Over the past year the Aussie dollar’s journey has been tumultuous to say the least. At one point it lost over 38c over three and a half months, going from it highest ever spot at US98.49 cents in the middle of July 2008 to a five-and-a-half-year low of US60 cents in October 2008. People were talking US parity one day and US paucity the next. But as they say on late night TV ads, ‘wait there’s more!’ because the Aussie just closed above $US0.8350 and it looks like the only way is up.

There are heaps of reasons behind this but the most obvious is geographical. Over 60% of Australia’s exports go to Asia, so the fortunes of the Aussie dollar are increasingly tied to the region, and specifically to our number one trading partner China where things are looking up. China’s GDP grew unexpectedly strongly at 7.9% in the second quarter of this year and it is throwing hundreds of billions of dollars at infrastructure that needs Aussie metals. So it’s not rocket surgery to see that as things improve in China they’ll need more stuff out of the ground from us to build more stuff on the ground for them.

Another reason is our relatively high interest rates. Put simply, investors are putting their money in our banks because we have higher interest rates than just about any other country (US Fed Reserve rates will hover between 0% and 0.25% for a while yet according to Fed Chairman Ben Bernanke)

The other thing behind the AUD rise is not so much the AUD strength but USD weakness. Basically, the shine has come off the US economy as a safe haven as it struggles against the GFC. By contrast, Australia looks peachy. We’ve yet to enter a technical recession, interest rates are relatively high, unemployment remains steady at 5.8% and as the global economy starts to emerge from recession (and there’s little doubt it is) everyone will want our commodities.

While all this makes the AUD an attractive prospect for investors, what does it mean for you? Well for starters that vintage 1940s five-string bakerlite banjo from Cletus in Alabama that you’ve been eyeing off on eBay is getting cheaper every day. Also if you’re thinking of travelling to the US you can get heaps more Graceland memorabilia bang for your buck. Add to that the ongoing airline price war and you gotta ask yourself ‘will there ever be a better time to see Elvis’s Jungle Room?’ As for the long-term, well with those commodity billions hopefully flowing into our economy, employment and job security will improve as will consumer demand, which means more prosperity for us all.

And in other news … as picked by most commentators, the Reserve Bank has kept official interest rates on hold at 3%, but look closely at its statement and you’ll notice its dropped references to ‘scope for further easing’. In other words further rate cuts are now looking less likely because of the recent strong upswing in consumer and business confidence as highlighted last week in our analysis of NAB’s June quarter Businesses Confidence Survey.