Rising Consumer Confidence Lifts the Aussie,

But Will It Last?

So, the Australian dollar's recent run of bad luck has come to an end, but is it just a temporary reprieve?

Peter Lavelle, 14.02.2013

Australia's currency broke its six-week decline this week, to climb from 1.029 against the US dollar to 1.0351 (a +0.59% gain), and 0.7685 against the euro to 0.7732 (a gain of +0.61%.) This was chiefly thanks to reports that consumer confidence in Australia hit a two-year high this month.

However, with the mining boom set to peak, and Australia seemingly fresh out of alternatives avenues for growth, will this rebound endure?

Let's take a closer look.

Why the Aussie Rose this Week

Rising consumer confidence gives the Aussie a lift

The Aussie jumped this week, as Westpac's February survey of consumer confidence jumped 7.7%, its biggest single-month gain since December 2010.

This lifted Australia's currency, because it brings an end to a recent spell of "soft" economic data out of Australia. This includes reports that the country created virtually no full-time jobs last month, while home loans fell -1.5% in December.

Lower interest rates at last providing a shot in the arm?

More broadly, Westpac's confidence survey signals that a recent spate of interest rate cuts by the Reserve Bank of Australia (RBA) may at last be having an effect. The central bank has cut rates -1.75% since December 2011, to a record low of 3.0%.

The hope is that, with credit so much cheaper, more people will be encouraged to take out loans and mortgages, lifting the economy, even as the mining boom winds down. If Australia lives up to its nickname of "The Lucky Country", that's exactly what will happen.

What's Next For The Australian Dollar

Higher consumer confidence just a one-off, or the start of a boom?

Hence, whether the Australian dollar continues to climb depends a great deal on whether this consumer confidence data is an aberration, and Australia's economy will continue to soften, or if consumers in Australia are gearing up for a spending spree. Frankly, opinion among economists is mixed.

On the upside, Westpac chief economist Bill Evans said this week that "lower interest rates may finally be starting to gain more traction with the consumer."

If that's so, and we'll need more than one month's data to know for sure, Australia's economy could shortly be set to lift off again, taking the Aussie dollar with it.

On the downside however, Warren Hogan, of Australia and New Zealand Banking Group, commented this week that "In Australia, the economy is likely to remain quite soft over the next few years as the mining investment surge comes to an end."

This suggests Australia will really struggle as businesses invest less in the mining sector. If that's so, the Australian dollar will tumble too.

Rebounding euro will act against the Aussie

Furthermore, looking ahead, it's worth noting that the Australian dollar's value won't just depend on what's happening on Australia. In addition, the rebound we're seeing in the euro will also play a big part.

Last year, the Australian dollar climbed because confidence in the euro was so low, as investors feared its collapse. That sent the Aussie higher as an alternative.

However, with concerns about the euro now all but banished, investors are "unwinding" last year's positions, and pouring money back into the euro that would've been there in the first place, if not for the Eurozone debt crisis.

What that means is, all else being equal, there's a bias toward the euro strengthening right now, at the Aussie's expense. That's something to be aware of.

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