Solid Growth Not Enough to Prevent the Aussie Sliding

The fall in the prices of resources means solid growth is not enough to keep the Australian dollar as expensive as it was.

Peter Lavelle - 06.09.2012, about exchange rates during the 30th August to the 6th September 2012.

Changes in the Aussie exchange rate:

  • Pound to Australian dollar: 1.5322 to 1.5548 (+1.475%)
  • US dollar to Australian dollar: 0.9651 to 0.9812 (+1.668%)

What's Affected the Exchange Rate this Week:

Can anything stop the Australian dollar's downward slide?

The antipode currency lost two cents against the pound and US dollar this week, in spite of the fact that Australia expanded at a faster pace than almost any industrialised nation in Q2.

Of course, if you plan to relocate to Australia, this is fantastic news, as it means you receive more Australian dollars when you exchange your pounds or US dollars.

Australia grew +0.6% between April and June, faster than the UK, Eurozone or United States.

In fact, this is something of a landmark for the Lucky Country, as it means Australia "has successfully completed a stunning 21 consecutive years of economic growth - a feat not matched by any other advanced economy over this period," as Treasurer Wayne Swan notes.

However, the Australian dollar has fallen because, so far as the financial markets are concerned, that's already in the past. What's going to keep Australia out of recession looking ahead?

Alas, that's a much less certain prospect.

This week, for instance, iron ore prices fell another 2.5% to $86.90 a tonne, the lowest level since 2009.

This is important because, in the last decade, Australia has depended on demand for its iron ore to fuel growth. Hence, as prices fall, the likelihood that Australia can continue to expand diminishes.

Furthermore, it seems prices will continue to fall going forward. Sean Callow, strategist at Westpac Bank, notes: "A clear bottoming in China's industrial sector is unlikely in the next few weeks, leaving iron ore prices under pressure."

Elsewhere, Australia's domestic prospects look less certain too. Retail sales plunged -0.8% in July, beneath forecasts for a climb of +0.3%.

And while unemployment fell -0.2% last month to just 5.1% (meaning Australia has among the lowest joblessness in the G20) that's mostly because thousands of Aussies gave up looking for work, rather than new jobs being created.

So what's the prognosis for the Australian dollar in the coming weeks?

Well, Enda Curran at the Wall Street Journal compares the Aussie dollar to Wile E. Coyote, the coyote that chased Road Runner in the old Warner Brothers cartoons. In this case, "the high-yielding currency looks like it may have run over the end of a cliff and there's no floor in sight."

In other words, if the Australian dollar truly is the new Wile E. Coyote, the currency could quite soon be in for an epic fall. That, as I mentioned above, would be of immense benefit to people relocating to Australia.

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