Alroy Commentary - Australian Dollar - Ready for Free Fall?
Australian Dollar is one of the favorite currencies of trader. Since AUD hit the bottom and reach USD0.61 in 2008, it rebounded by around 70 percent to USD1.04 (16 October 2012). Chief currency strategist in Goldman Sachs, one of the well-known investment banks in Wall Street, said AUD may drop 20 percent in the Australian economy slowdown and commodity prices face downward pressure, and could drop to USD0.65 in the medium term, 36 percent below current market price, if the commodity prices drop sharply. So, does Australian Dollar ready to free fall?
Australia Dollar is well-known as a “commodity currency”. “Commodity currency” is the currency of country which depends on export of raw materials heavily and exchange rate is sensitive to commodity prices. Australia Dollar has appreciated against major currencies since 2008, there are three main reasons support the rally of AUD over last few years:
- Rebound of global economies in 2009 to 2010 raised the demand of commodities and their prices, which is positive to commodity currencies.
- The fundamental of Australian economy is better than other developed countries. For example, the debt to GDP ratio of Australia was 24.2 percent in 2011, while U.S. was 103 percent in the same year. The economic growth of Australia is also stronger than most of the developed countries.
- Australia is one of the countries which obtained the highest credit rating in the world. This means Australian Government Bond is one of the safest assets in the world. In contrast, U.S. lost the highest rating in 2011 because of the deteriorating financial health.
Graphic: Government Gross Debt Ratio in 2011
In summary, there are three main reasons investors turned bearish to Australian Dollar recently:
- Slowdown of global and Chinese economies hurt the prospect of export of raw materials. Commodity prices may continue under pressure.
- Limited supply of Australia Federal Government Bonds in this fiscal year: It means Australia could not attract as much as capital than previous year.
- The Royal Bank of Australia cut its target rate because of the slowdown of economy. The interest rate difference between Australia and other developed countries narrowed. Investors who seek for yield may find the interest rate of Australia is less attractive now.
However, even Australian Dollar is likely to under pressure for a period of time, investors should not ignore the positive side of Australia:
- Australia is expected to grow faster than most of the developed countries in coming year. Australia economy is expected to grow at 3.0 percent in 2013, compared to 2.1 percent in U.S.
- Investors are worry about the “hard landing” of China and hurt commodity prices. Recent data from China suggest her economy may be stabilized in the near future. If it is true, market may over-priced the impact of China’s weakness in the AUD now. The currency may not repeat the slump in 2008, at least not in near term.
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