Jim Morrison and the AUD

Andrew Pegler – 13 May 2011

Yep, the little dollar that could just keeps on coulding. As LA man Jim Morrison once opined in LA Women, it looks set to “keep on risin'”.

The latest culprit is something called the carry trade. This is where investors borrow in a currency that has low interest rates (for example, the Japanese yen), and then invest that money by lending it in a currency that has higher interest rates. What currency might that be? You guessed it: the AUD.

Before the GFC, the yen carry trade was mostly in U.S. dollars. But now their economy is in the doghouse, it’s the AUD’s turn in the spotlight.

As Alan Kohler wrote in Business Spectator, the large difference in interest rates between Japan and Australia (theirs are low, ours are high) has reignited the carry trade. He goes on to explain that the Japanese earthquake has also had an impact. In order to fuel a Japanese recovery, the Bank of Japan, in March alone, injected 15 trillion yen into the system. All those extra yen – that extra liquidity – just makes it easier for investors to sponge it up and plonk it in Australia, where they can make more money out of it.

And of course, when you have boatloads of investors selling yen to buy Aussie dollars, all that demand drives up the AUD. That’s supply and demand for you.

But that’s not all. Kohler points to two additional sources of demand for the AUD: a steady diversification out of the USD by global central banks, and the huge demand for Aussie dollars in the resource sector, which is expected to spend an historic $76 billion on mining investment in 2011/12.

It all adds up, folks.

And in other news… you might have heard Microsoft just paid an astounding USD$8.5 billion for Skype. That’s 400 times Skype’s 2010 operating income. Don’t look at me!

Skype struggles to get users to pay for premium services, and I dunno about you but I won’t be looking at pop ups while I’m on the blower to mum or sis.

The word on da street is that in playing catch up with Apple and Google, Microsoft was prepared to pay any price for the hip hit that comes with owning such an innovative, edgy company. But is it too late?