Peter Lavelle, 31.01.2013
The last week wasn't what you'd call the Australian dollar's finest hour.
The Aussie fell to the UK pound, euro and US dollar, chiefly on news that America's economy unexpectedly shrank -0.1% at the end of 2012.
This hurt the Aussie, because the United States is the world's largest economy. What happens there hence has global repercussions, including potentially limiting Australia's exports to the US. Hence, this news also affects Australia, reflected in the lower AUD.
However, in spite of this one week's losses, I wouldn't be too concerned that the Aussie is going to keep losing value. There's too much good stuff on the horizon for this year to hold it down.
For instance, this -0.1% contraction in America's economy is widely seen as a blip. It reflects a one-off cut in defence spending by the Pentagon, rather than anything bleak in America's outlook.
Quite the contrary, the US housing market is on the rebound, more jobs are being created, and consumers are more confident. All that should lift the States in 2013, which, as I mention, will also add up to a rising Aussie dollar.
In addition, the outlook for Australia looks bright too. Yes, mining investment is set to peak following a stellar run over the past half decade. But the Reserve Bank of Australia's 1.75% in interest rate cuts since last year have stoked housing demand, adding up to an alternative source of growth.
For instance, Australia's Housing Industry Association notes that new home sales jumped 6.2% in December, with further rises to come. To the extent that keeps Australia's economy in the pink, it will also buoy the AUD.
Furthermore, it's unlikely the Reserve Bank will keep cutting interest rates. For one thing, this reflects the fact that it's already cut rates 1.75% in the last 12 months, as I mention. That's widely deemed stimulus enough to get businesses investing, and consumers borrowing. Second, there's the fact that inflation in Australia is well contained.
Prices rose 2.3% in the last three months of 2012, -0.1% less than forecast. That gives the RBA little reason to cut its 3.0% rate. Insofar as that makes Australian bonds more profitable, it will lift the Aussie too.
In short then, we've seen this week that the Australian dollar is susceptible to what happens elsewhere on the globe. Bad news out of America can have more impact on the Aussie than Australia's own economic outlook.
Yet this is a door that swings both ways. As the US economy picks up in 2013, as it's forecast to do, that will lift the Aussie. Meanwhile, Australia's own bright outlook will also provide support. For the moment then, I think we can look forward to a continually strong Aussie dollar this year.