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Category — Australian Dollar
Globalization Causing Worldwide Inflation
Inflation has always been an important concern for currency analysts, if only because it has a direct relationship with interest rates. Central banks have a mandate to keep inflation under control, and so signs of rising inflation indicate a strong currency. But the new paradigm of an increasingly international economy could leave monetary policy makers impotent in the face of global inflationary surges.
Commodity prices are near record highs, and interest rates do not have the power to completely moderate supply-side inflationary pressures. Oil is selling for almost $80/bbl, and there are market analysts who believe we are likely to see $100 oil by 2008. That would put oil at the $100 level one full year before Goldman’s now infamous oil projections of last year. Gold and food prices are also through the roof (they are the primary driver of high prices in Australia and New Zealand). With growing demand for commodities from developing economies, price pressures are not in line to let up anytime soon. In the forex market, the most prominent consequence of the commodity boom is the incredible rise of the three major commodity currencies (Canadian dollar, Australian dollar and New Zealand dollar).
But more troubling for fans of domestic monetary policy is that inflation is also being stoked by rising prices for finished goods and services. This phenomenon has surprised many observers because it seems counterintuitive to the idea of globalization. Free trade was supposed to lead to higher efficiency and lower prices. But with emerging markets all over the world on the rise, we are seeing more and more wealth in the developing world. A booming economy naturally leads to higher prices, and the Chinese yuan, Indian rupee and other emerging market currencies have appreciated significantly this year. Goods from these countries are now more expensive, and so as we buy imports from the rest of the world, we see China and India and Brazil exporting inflation.
Growing wealth in the world’s developing areas has other consequences of inflation as well. Rich foreigners buy assets in the developed economies, and more buyers drives up the price of these assets. This is partly the cause of exploding real estate prices in London. For those concerned about the US dollar, we should note that the weak dollar makes US assets especially attractive. It is as if US products were being sold at a discount relative to prices in the past. This is why foreign ownership of US securities reached record levels last May. But forex traders should still keep track of the current state of the US dollar. Traders like to invest in markets that are growing (and economies that are healthy. So while a weak dollar might be good for the US economy, a weakening dollar is bad. And with central banks less powerful in the face of the new global economy, we might not be able to do anything about it.
July 23, 2007 No Comments
Commodity Currencies Rise on Dollar Weakness
Commodity currencies have been beating up on the US dollar and the Japanese yen recently and yesterday was no different. The Canadian dollar, the New Zealand dollar and the Australian dollar all hit new highs, an occurrence so common in that last couple of weeks that’s most traders simply yawned. Some of the underlying support for these currencies comes from high commodity prices, especially oil and gold, of course. But much of the gains should also be attributed to weakness in the US dollar and the yen carry trade.
It is pretty easy to spot the strength the commodity currencies have derived from greenback bears. The data released in the respective countries has not been really great. Canada’s inflation numbers yesterday printed lower than expected. Australia and New Zealand have not released much data recently, and what has been released has been worse than expected.  But the rise of the Loonie, Aussie and Kiwi cannot be stopped. And that can be traced back to the sluggishness of the US dollar. And the market consensus after Fed Chairman Bernanke’s speech is that US interest rates are likely to stay the same for some time. Bernanke also seemed more concerned about the slumping housing market than he has been in earlier speeches. And so the commodity currencies should continue to benefit from the weak dollar.
The other factor fueling the fresh highs in this area of the forex market is the yen-based carry trade. The interest rate advantage for Australia and New Zealand compared to Japan is enormous, and currency traders just cannot seem to get away from the high yields. And that differential is likely to get higher as the futures market lists a 66% probability that the Reserve Bank of New Zealand will raise the country’s interest rates, already the highest in the industrialized world, at its next meeting. Most currency analysts are pricing in another rate hike this year for the Royal Bank of Australia as well.
The appetite for risk (as well as the hunger for yield) in the market is tremendous, and the surging carry trade is reflective of that. AUD/USD is at an 18-year high and NZD/USD is at its highest level since the currency was floated in 1985. While the amazing rate of appreciation might be hurting the country’s exporters, the situation is only exacerbated by the weak greenback. It is because of this phenomenon that the Canadian dollar is up 12% already this year, with the USD/CAD hitting 1.0416 this morning, its highest level since 1977. But the latter pressure is not likely to go away anytime soon as many analysts are touting the weak US dollar as good for the American economy.
July 19, 2007 No Comments
The United States Dollar Versus The World – Getting Bang for Your Buck
The New Zealand dollar and Australian dollar are seeing record highs at Wednesday’s closing versus the United States dollar.
After unemployment rates bottomed to less than 4%, a 33-year low, the Aussie reached a point it had not been to in 17 years. It closed yesterday up 0.5% to 0.8444 against the dollar and 0.6 per cent to Y102.46 against the yen. This raised much speculation that Australian interest rates will be raised in the near future.Â
Reserve Bank of New Zealand, its central bank, surprisingly raised interest rates yesterday from 7.75 to 8%, the highest rate since induction in 1999, in order to limit inflation. Inflation was hovering around the 4% mark, while the government wanted that rate between 1-3%. As the market closed, the kiwi rose 0.7 per cent to $0.7555 against the dollar, reaching 22-year highs, and 0.9 per cent to Y91.63 against the yen.Â
As the kiwi, as termed by New Zealand’s locals, and Aussie were hitting new heights, the dollar held its ground against the euro, yen, and pound, respectively. The dollar advanced, rising 0.3 per cent to $1.3465 against the euro, 0.3 per cent to Y121.40 against the yen and 0.6 per cent to SFr1.2235 against the Swiss franc.
Although the dollar was successful yesterday against the euro, yen, and pound, it is still below value against many of the other popular and heavily traded currencies in the forex market. For more coverage of the forex market and recent currency trading news, check out dailyfx.
June 7, 2007 No Comments
AUD/USD Pushes Further Toward Seventeen Year High
After passing the ten year high set recently the AUD/USD’s next mission is to break the December 1996 high of .8215 to seek levels set in October of 1990. Retail sales came in better than the expected .8% m/m at .9% m/m causing the pair to rally around 100 pips.
April 2, 2007 No Comments
AUD/JPY Shoots For 100
Last time the aussie crossed 100.00 it failed to close on a weekly time frame and collapsed quickly thereafter falling 600 pips the next week, and 44% over the next three and a half years down to 56. After six years of recovery, today AUD/JPY pushes to new highs printing at 93.18, a place it has not seen since right after the crash in 1997. Signs points to higher with the expected continuance of the large yield spread between the two currencies.
December 20, 2006 No Comments
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