Tags: australia | dollar

The Australian Dollar Will Remain on Top

By    |   Wednesday, 03 Jun 2009 03:32 PM

As I’ve been scanning through the performance of each major currency over the last month or so, I’ve noticed that Australia has been the clear leader.

Australia’s currency has grown 10.78 percent since January 1. The rest come in like this: Canada (7.14 percent), New Zealand (5.35 percent), British pound (3.85 percent), euro (minus 4.31 percent), United States (minus 5.58 percent), Swiss franc (minus 6.17 percent), and in last place Japan (minus 10.34 percent).

I want to talk to you about the three major reasons why I believe Australia is on top and more importantly why I believe it will remain a top performer this year and next year.

First, Australia has the only positive GDP of any major industrialized nation. That’s huge. Gross domestic product is a basic measure of an economy's economic performance. It’s the market value of all final goods and services produced within the borders of a nation in a year.

In this global recession, most countries have lost ground economically to the tune of 2 percent to 10 percent this past year. However, Australia is the one major industrialized nation to hold a very slight economic gain of 0.3 percent.

While this sounds meager, it's better than the massive steps backwards that most of these other nations have incurred.

As the global recession ends in the coming months, Australia will be one of the countries that is the least beaten up and can resume its growth mode much more quickly than many countries. This will be bullish for the country and therefore bullish for the Aussie dollar (AUD).

Second, Australia's CPI is among the highest of any major industrialized nation. The CPI tracks inflation. Australia’s inflation is at 2.5 percent while many nations are in the 0.6 to minus 0.7 percent range.

As the global economy starts to hit on all cylinders once again, Australia’s inflation will soar even faster and leave many of the others in the dust. That will work in Australia's favor.

Inflation has to be tamed by hiking interest rates. As rates are hiked, money tends to be drawn to the currency because investors can earn a much higher yield by being in that currency, not to mention its money markets, government and corporate bonds, and certificates of deposits.

This all draws money into the currency first before it goes onto any of these other financial instruments within Australia. That will bid up the currency and give the currency investor further appreciation gained in their position.

Lastly, Australia already has the highest interest rate of any industrialized nation. While many countries had to join the race towards a zero interest rate policy, Australia didn’t have to join in on that game. It had to lower rates a bit, but nothing in comparison to most other countries.

So, as many countries continue to have interest rates in the 0.1 percent to 1 percent range, Australia holds the highest of them all at 3 percent right now. That’s a huge lead on any other major industrialized nation out there.

Australia is starting with a higher interest rate. It will be among one of the first to have to raise rates higher due to their rate of inflation and growth, so that makes it a top pick for major banks and institutions as they seek higher yields on their money.

All of this will propel the Aussie dollar much higher against currencies that have these fundamentals going against them, such as the U.S. and Japan.

For instance, interest rates in the United States are around 0.25 percent, and Japan has a rate around 0.1 percent.

Japan’s GDP is minus 9.7 percent, while the United States is at minus 2.5 percent.

Year-over-year inflation in the United States is minus 0.7 percent while Japan’s is minus 0.1 percent.

So, when you couple the best fundamentals (Australia) with some of the worst fundamentals out there (the United States and Japan), you can see why it is prudent to buy the AUD/USD and AUD/JPY currency pairs.

These fundamental dynamics won’t be reversing course anytime soon. This will cause the Australian dollar to continue to rise, particular in relation to the U.S. and Japanese currencies.

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SeanHyman
As I’ve been scanning through the performance of each major currency over the last month or so, I’ve noticed that Australia has been the clear leader. Australia’s currency has grown 10.78 percent since January 1. The rest come in like this: Canada (7.14 percent), New...
australia,dollar
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2009-32-03
Wednesday, 03 Jun 2009 03:32 PM
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