Peter Lavelle - 19.07.2012
The Australian dollar has had rockets attached to its feet this week! The antipode currency reached 0.8461 against the euro last night, its highest rate against the common currency since its launch in 1999, as well as a 10-week high against the US dollar.
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If nothing else, this tells us that Australia continues to outperform the Western world by a country mile, as the markets look for high returns. So what exactly sent the AUD flying?
To be honest, in economic terms this hasn't been Australia's finest hour.
National Australia Bank's survey of business conditions fell to -1 in Q2, compared to +3 in the first three months of 2012. This indicates Australian businesses believe the economic climate is tougher today. In addition, business confidence decline to -2, against -1 previous.
What this indicates is that, if you listen to Australia's business people, the "lucky" country has encountered a spot of bad fortune lately.
But on the other hand, just because Australia businesses think times are tough, doesn't mean it's actually the case. Indeed, there's a good argument to be made that Australian business is unduly pessimistic, given their county's poll position in the global economic race right now.
For instance, the latest Westpac study of Australia's growth prospects hit its highest point since last August this month.
Bill Evans, Westpac's chief economist, noted: "Growth in the second half of 2012 and into 2013 will adopt an improving tempo." This signals Australian business has nothing to fear from a slowdown.
That's one reason then the Australian dollar climbed this week: business pessimism aside, the forecast in fact looks pretty hot. But in addition, it's Australia status as a high-flying economy in the global downturn that's boosting the AUD.
For instance, this week the Bundesbank announced it would begin buying up Australian government bonds, to add to their foreign reserves. Now, when the German government believes you're a good enough bet that it starts buying your debt, chances are you're in good shape!
Furthermore, the Germans aren't the only ones doing this: in the past 12 months, 30 new governments around the world have started buying AU bonds.
This is the chief reason the Australian dollar has gained. Governments and international investors are ploughing into Australia, buying the dollar in the process, in a bid to find a good investment.
Indeed, as Robert Rennie, senior currency strategist at Westpac Banking Corp, comments: "Even when world markets are nervous and commodity prices are falling, the Australian dollar is showing less and less sensitivity."
So the things that might previously have hurt the dollar (such as falling commodity prices) are not so influential now, as the world floods Australia with cash.
Looking ahead, there's no reason to think this trend won't continue. That would mean the antipode dollar keeps climbing.
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