Australian Dollar Dawdles, as China Growth Meets Forecasts

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Peter Lavelle - 18.10.2012 covering the 11th to 18th October 2012.

Exchange Rate Changes

  • Pound to AUD: 1.5583 to 1.5535 (-0.308%)
  • Euro to AUD: 1.2598 to 1.2621 (+0.138%)
  • US dollar to AUD: 0.9745 to 0.9630 (-1.18%)

The Australian dollar was broadly unchanged against the pound and euro this week, while gaining more than a cent against the US dollar. However, while this is true, we shouldn't think it gives us the full picture.

Because in fact, the Aussie dollar has been bouncing around for a month now, with no lasting changes in the exchange rate. If you go back four weeks to mid-September, you'll see the rates almost exactly where they are now.

What this means for you is that, while there have been countless predictions about the demise of the AUD of late, the currency is holding its value. If you're in Australia and want to exchange your dollars into other currencies, this is therefore good news.

What's Affected the Australian Dollar This Week

The chief reason the Aussie held its own this week, is diminishing fears about China's growth outlook. The Asian tiger expanded 7.4% in the third quarter (between July and September) in line with market forecasts. As Forex.com's Chris Tedder notes, "China is expanding at a pace the market deems acceptable."

This benefited the Australian dollar because China accounts for 23.0% of Australia's exports, chiefly in iron ore and coal. Hence, if the world's second largest economy is growing at an acceptable pace, that improves the economic outlook in Australia too.

What's Going to Happen Next

The AUD has been bouncing for the last four weeks, as I mention. Looking ahead, I see little reason why that should change.

The Reserve Bank of Australia, for instance, is still forecast to further cut interest rates in Australia, which would normally make the currency weaken. Yet there's little questioning the fact that, on the other hand, Australian bonds remain an attractive investment given the country's AAA credit rating. That could sustain demand for the Australian dollar.

In addition, the currency could well be subject to changes in sentiment stemming from the European Union summit today. If Spain requests a full bailout, for instance, we could look forward to the Aussie dollar climbing, as this would settle the Mediterranean country's financial outlook for months to come.

How This Affects You

If you're in Australia and want to buy other currencies, this continued Aussie dollar strength is to your advantage. This is because, the higher the Aussie, the more foreign currency you can expect when you make your transfer.

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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