Australian Dollar Climbs on High Inflation, Chinese Manufacturing

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Peter Lavelle - 25.10.2012. This report covers the 18th to 25th October 2012.

Latest Exchange Rate Changes

  • Pound to AUD: 1.5535 to 1.549 (-0.29%)
  • Euro to AUD: 1.2597 to 1.2533 (-0.508%)
  • US dollar to AUD: 0.9635 to 0.9642 (-0.073)

The revival in the Australian dollar continues!

The antipode currency climbed for the third consecutive week this week, following an August to September period in which it broadly lost, as Chinese manufacturing gains pace, Australian inflation blows up, and the Aussie benefits from the US Federal Reserve's third round of quantitative easing.

What Affected the Aussie This Week

Australian inflation rises above forecasts

One big reason the Aussie continued its ascent this week is an unexpected rise in inflation. Prices in Australia jumped 2.0% in the third quarter compared to this time in 2011, much more than the 1.6% forecast. In part, this reflects the Labour government's introduction of the controversial carbon tax.

Importantly though, higher inflation means there's a lower chance of the Reserve Bank of Australia cutting interest rates, when it next meets on November 6th. Indeed, following this release, Bloomberg slashed its odds of a rate cut from 95.0% to 77.0%. That benefited the Aussie because, if interest rates are higher, international investors can expect much better returns from Australian bonds and equities.

Chinese manufacturing gains pace

Furthermore, the Australian dollar also climbed, as a closely watched Chinese manufacturing survey showed the vast sector almost exited recession this month. HSBC's Chinese Purchasing Manager's Index (PMI) rose to 49.7 in October, close to the 50.0 dividing line that separates growth from contraction.

This benefited the Australian dollar because China is Australia's biggest export market. Hence, if China expands, its demand for Australian coal and iron commodities grows too. That in turn sees the Australian economy expanding at a faster pace.

Fed stimulus sparks Aussie in-flows

Last but not least, the Australian currency also climbed this week, as it benefited from in-flows resulting from the US Federal Reserve's announcement of a third round of quantitative easing. Last month, the Fed signalled it would inject US $40bn into the economy each month forever, until unemployment fell.

This sparked a mass rally in stocks and equities worldwide, with investors everywhere buying up assets the might previously have been reluctant to purchase. Given that, the Australian dollar has been included in this rally, and could be supported just as long as the Federal Reserve keeps pumping in cash.

How This Affects You

The rising Australia dollar is of benefit if you're already in Australia, and want to repatriate funds back to your home country. If, for instance, you want to exchange AUD or pounds or USD, this current surge in the Aussie is advantageous. Furthermore, given the recent uptick in Chinese manufacturing, as well as these Federal Reserve in-flows, the antipode currency could well keep climbing into the future.

Furthermore, if you like the current Australian dollar exchange rate, but don't yet wish to exchange currencies, you might consider a forward contract. This enables you to lock in the current exchange rate, so that you can transfer your money at any time you wish in the next two years at no extra cost.

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