Australian Dollar on Pause as Economists Debate Future Strength

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Peter Lavelle - 27.09.2012

Exchange rate changes this week: 20th to 27th September 2012

  • GBPAUD: 1.5576 to 1.5564 (-0.077%)
  • USDAUD: 0.9576 to 0.9609 (+0.345%)
  • EURAUD: 1.2419 to 1.2385 (+0.274%)

So the Australian dollar is on pause!

As you can see here, the Aussie is little changed against its main counterparts this week, as financial markets await events in Spain and the Reserve Bank of Australia, and economists ponder whether Australia's mining boom, as well as the high Aussie, have much further to run.

Following a turbulent six weeks for the Australian dollar, in which the European Central Bank announcement of its bond buying scheme pushed it down against the pound and euro, then the Federal Reserve unveiling of QE3 pushed it back up, this is the calmest we've seen the currency in some time. If you're wondering when is the best time for you to buy Australian dollars then, this could give you some breathing space.

What's Affected the Australian Dollar This Week

As I mention, the Aussie dollar has been enjoying a bit of a breather this week, as economists wonder just what the future has in store for the antipode currency.

On the one hand, we have those economists who argue the Australian mining boom has finished, as China, Australia's biggest customer of coal and iron commodities, slows down, leading to inevitable troubles in Australia itself. Greg Gibbs, currency strategist at Royal Bank of Scotland, for instance said this week: "This case against the Australian dollar is building."

Yet for other economists, this doesn't take into account the fact that Australia is still in (arguably) the most enviable economic position in the world, as the only industrialised nation to enjoy +3.0% growth at present. To this end, Barclays currency strategist Hamish Pepper said this week there is: "Continued real money demand for Australia's sizeable pool of high-quality assets."

So has the Australian dollar peaked? For me, the case for both sides is fairly evenly matched. There's no doubt the outlook for Australia has become less amenable in 2012, as the mining boom runs down. Yet this doesn't change the fact that Australia still occupies an enviable position, with commodity prices close to historic highs even despite their recent falls, and billions of dollars in investment lined up.

What'll Happen to the Australian Dollar Next

In the next week, whether the Australian dollar rises or falls will depend both on the Reserve Bank of Australia, and Spain.

To look to the RBA first, expectations are high the central bank will cut interest rates next Tuesday. This reflects the fact that, at 3.5%, Aussie interest rates are among the highest in the world, driving up demand for the Aussie dollar. However, given that the high dollar has ravaged Australian manufacturing, by making its exports prohibitively expensive, the central bank may need to cut rates to moderate that. That would see the Aussie fall.

Spain meanwhile is fighting a war with itself on multiple fronts at the moment. For one, prime minister Mariano Rajoy is set to unveil the 2012/13 budget today, containing a new batch of spending cuts and tax rises. Catalonia meanwhile, Spain's richest region, has declared a regional election for November 24th, widely seen as a referendum as to whether it should secede. If these go badly, as they well might, the Australian dollar would fall on risk aversion.

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