Hopes of a global stimulus by central banks have pushed the Australian dollar up. But there are not many reasons for the currency to continue to rise.
This article expains why.
Peter Lavelle - 13.09.2012, covering the 6th to the 13th September 2012.
Exchange Rate Changes:
The Australian dollar has come out ahead this week, claiming ground from the pound and US dollar, while enduring only slim losses against the euro.
This marks something of a turnaround for the Aussie, which in recent weeks has slid backward on the market, as concerns about Chinese growth and Australia's mining boom eat into confidence. So what explains this turnaround, and will it last?
The Australian dollar's gains this week have almost nothing to do with Australia. Instead, the Aussie has gained because of hopes that global central banks will soon intervene to bolster the global economy.
Last week for instance, the European Central Bank announced Official Monetary Transactions, a tool to buy Spanish and Italian government bonds without violating its inflation-fighting mandate.
Now, since the ECB can print euros, that gives it effectively unlimited ammunition to help the Mediterranean countries, and prevent them crashing out of the euro. Hence the fillip to global confidence, and the rising Australian dollar.
In addition, the market has its fingers crossed that today the Federal Reserve will announce QE3 (quantitative easing) in an attempt to revive the flagging US labour market.
For instance, last month the US created just 96 thousand new jobs, less than half the rate needed to cut the unemployment rate. Hence, as Daisaku Ueno at Mitsubishi UFJ Morgan Stanley Securities Co notes, "The markets are seeing a good chance that the Fed will announce QE3 today."
That too has aided the Aussie, because more US dollars sloshing round would boost the global economy.
Just because the Aussie has gained this week, doesn't signal a permanent turnaround in its sinking fortunes. In fact, there are several reasons to suspect the Australian dollar will resume its decline before long.
For instance, joblessness in the country's crucial mining sector fell for the first time since 2009 last month, as investors cancelled projects.
Mining has been the sole biggest creator of jobs in Australia since 2007, signalling that the good times might be at an end.
As a result of that, the Reserve Bank of Australia may soon react by cutting interest rates, in an attempt to encourage borrowing and investment and so prevent unemployment rising too much.
However, both these things would contribute to a falling Australian dollar.
If the Australian dollar continues to slide, as looks likely, that makes buying the antipode currency increasingly inexpensive. If you plan to relocate to Australia then, or buy property Down Under, that would be to your benefit.