The highs of the Australian dollar

The Australian dollar is doing rather well, these days. It isn’t hard with regard to the US dollar (the GBP looks reaonably comfortable over USD2, these days), but we’re performing well overall. For the US and Europe (data from the Reserve Bank. The vertical lines are days upon which trading was closed), looking at monthly averages since the Euro floated:

ForEx AUD to USD, EUR

Which, for the AUD to EUR exchange rate, more or less matches our Trade-Weighted Index:

TWI

Our performance against the USD is similar to that against the JPY, in that it isn’t related to the value of our trade, etc. but to currency speculation of various types.

ForEx AUD-JPY

As the coverage discusses, investment in the AUD is coming from so-called carry trades, funded with sales of JPY. Carry trades consist of selling Japanese debt (in this instance) and buying Australian debt. So borrowing money in Japan, with lower Japanese rates, and lending that money in Australia, which has higher interest rates (and an expectation of still higher rates, with our own economy almost at full employment, and a resources boom coming in from the expanding economies of China and India).

This relates to that warning from the Bank for International Settlements. Here are 3 currencies, relative to the Australian dollar – and only the Euro is mostly trading according to, well, trade. The US dollar is trading in part according to its own economy, and what we expect to become of it shortly (and that is a going to be in large part a function of financial ups and – more likely – downs), while our performance relative to the Japanese Yen is a function of currency speculation.

Which, one can argue, is fine – exchange rates are supposed to prevent arbitrage and, if they don’t correct themselves in response to these movements, people deserve to make money off of it. Meanwhile our more valuable dollar may help slow our economy, and vice-versa for the Japanese economy. Our Current Account Deficit (AUD15bn or so – about the price of a medium-sized leveraged buy-out, these days) won’t appreciate the efforts, though, nor will domestic Australian producers. I guess I just don’t like speculation. Macroeconomic management is hard enough without wankers seeking to be the next Soros making it more difficult.

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2 comments so far

  1. peter sivey on

    Yeah this is pissing me off. Any money I take to aus will be worth peanuts.. Rate against £ has gone from over 2.5 to 2.35 ish. But then again if I want to transfer the money back into £, I will be better off – a bit complicated. It will all have changed again in 6 months though I suppose…

  2. zooeygoethe on

    Pete, GBP1 to AUD2.35 won’t be peanuts. The cost(s) of living in Melbourne are a good deal less than York, South of England, etc. Holidays back in blighty from Australia – that’s going to be what hurts.


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