Strong ‘Aussie’ Signals Healthy Economic Recovery

Posted by: : Paul EbelingPosted on: March 31, 2014 Strong 'Aussie' Signals Healthy Economic Recovery

Strong ‘Aussie’ Signals Healthy Economic Recovery

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AUD, ‘Aussie’ Friday morning hit 92.72 US cents, its highest mark in 5 months and a level which makes exporters uncomfortable.

Many importers and exporters believe that their ideal level for the Aussie is 85 to 90 US cents. When the Aussie rises over 92 cents, the competitiveness of exporters is weakened, according to a survey of Citi Group (NYSE:C).

“An optimal exchange rate from a trade perspective is one where importers and exporters can both find some advantage. Now that the currency has appreciated beyond this level, we’re moving into positive territory for importers and headwinds for exporters,” Citi’s trade and treasury solutions head said.

The preliminary PMI figures for March, which measure activity in China’s manufacturing sector which were released Monday, showed that the industry had slowed down for the third straight month. But the weak data from China just dragged Aussie dollar temporarily to 90.5 cents, from then on the Aussie appreciation rallied for 4 days running.

It seems strange that in spite of recent price fall of Iron Ore, Copper and weak economic data of China, the Aussie  continued to rise unaffected. The market logic read the whole thing the other way round. The traders are betting that China will roll out some stimulus measures to stabilize its economy.

Last week Chinese authorities approved 5 railway projects worth CNY 142-B (AU$25.03-B).

Surely Beijing wants a soft landing of the economy and any sharp drop of economic activities will hurt the job market and cause instability of the society, which is totally unacceptable for the Chinese government.

Last Wednesday, Reserve Bank governor Glenn Stevens expressed positive attitude towards Australian economic outlook at the Credit Suisse Asian Investment Conference in Hong Kong.

“We are going to have a boom in residential construction over the next couple of years. That is very much on track,” Mr. Stevens said.

He also said there was early, encouraging evidence the handover from mining to non-resources industries in the Australian economy was underway.

There Mr. Stevens is confirmed that his low interest and low exchange rate policy is working well, especially in the property market. Also, he is not worried about potential domestic housing bubble.

“There are some people who think that Australia is in a bubble, ” Stevens said, “You can never be 100% sure. But the price to income ratio has been around four times … for about 10 years, so a very long-running bubble, if it is a bubble. Most do not last that long.”

Mr. Stevens’ upbeat speech pushed Aussie  even higher, although he still believes that AUD  is too high.

“The long-running equilibrium of the exchange rate is probably lower and we have been quite consistent in saying that,” he said.

While some analysts said the Aussie could climb higher in the near future, the expected strengthening of the USD, as the American economy recovers and Fed tapering will eventually push the exchange rate South.

“Stevens explicitly used the word ‘welcome’ for tapering in his speech. He is very much assuming that the USD does strengthen on the back of that normalization of Fed policy, so this could just be a temporary bout of Aussie strength. Given some time … the Aussie will come back anyway,” said Westpac’s senior currency strategist.

Stay tuned…

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Paul Ebeling

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Paul Ebeling

Pattern Recognition Analyst, equities, commodities, forex
Paul Ebeling is best known for his work as writer and publisher of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly-regarded, weekly financial market letter, where he enjoys an international audience among opinion makers, business leaders, and respected organizations. Something of a pioneer in online stock market and commodities discussion and analysis, Ebeling has been online since 1994. He has studied and worked in the global financial and stock markets since 1984.
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