The mighty Aussie dollar

[Springbok]

Article in Sydney Morning Herald

"Why is our market so big? Our useful place in the 24-hour time zone probably helps. American and European banks can keep trading here while their own markets are closed."

"If you take just the simple trading of one currency for another ('spot trading' as it's called), in our market, it's grown from $4 billion a day in 1985 to be worth more than $70 billion a day this year."

"One of the factors that contributes to foreigners' interest in holding Aussie dollars and Australian-dollar investments is the growth of the "carry trade". This is where people borrow funds in the currency of a country that has low interest rates (such as Japan or Switzerland) and invest them in the currency and investments of a country that has high interest rates (such as Australia or New Zealand)."

"And for much of the past four years the Aussie has appreciated against the yen. This helps explain the popularity of Uridashi bonds - Australian-dollar corporate bonds that are sold directly to Japanese small investors."

[Bob]

We hear, in Australia, about the growing strength of Australia's mineral boom and the impact this is having on Australia's terms of trade, driving the Aussie up, to the detriment of the manufacturing sector which is battling against a high Aussie.

Is the Aussie simply rising because of Australia's exports of minerals (which an energy and mineral hungry world can't get enough of) or does the low-interest / high-interest currency difference also push it up?

[Springbok]

We hear, in Australia, about the growing strength of Australia's mineral boom and the impact this is having on Australia's terms of trade, driving the Aussie up, to the detriment of the manufacturing sector which is battling against a high Aussie.

Is the Aussie simply rising because of Australia's exports of minerals (which an energy and mineral hungry world can't get enough of) or does the low-interest / high-interest currency difference also push it up?

A currency is influenced by a diverse mix of factors, but in a way, the same happened in South Africa - demand for minerals was driving up the ZAR, to the detriment of exporters. However the falling US$ also resulted in additional strength of all other currencies. Then you have the carry trade, thanks to interest rate differentials between countries.

e.g. an American borrows US$ at a low interest rate (say 2%) in the U.S., converts the US$ to ZAR and invests in South Africa, earning a higher interest rate in S.A (say 10%). As more people exploit this interest rate differential, the currency of the country with the higher interest rate should appreciate (as more investors buy that currency), which will eventually result in that country's reserve bank lowering the interest rate until the carry trade is no longer profitable. As foreign investors exit, the currency should depreciate again. So the investor will have made a net interest gain, as well as a foreign exchange gain if the high-interest rate currency appreciated against the low-rate currency during the carry trade period. Lower interest rates will stimulate consumer spending, driving up prices and inflation, until finally the reserve bank will start raising interest rates again to reign in consumer spending. But of course the real world is not this simple.

Although the ZAR and Au$ are both commodity currencies, the Au$ is much stronger against the US$ than the ZAR, because Australia has lower inflation than South Africa, has lower perceived political risk, etc. So it's quite complicated the factors that determine a currency's exchange rate.

Should the US$ continue to fall and China/India's demand for commodities remain high, the "best" currencies should be the Au$, the Canadian$, and Swiss Franc. And of course gold. Keep an eye on the Chinese renminbi, the yuan (pronounced "you-hen") as well - China probably wants it to eventually overtake the US$ as the world's reserve currency.

India’s GDP growth for the quarter ending September 2006 it was 9.2%! So invest in the emerging world, invest in gold and base metals, invest in energy.