Australian to US Dollar
he rate of exchange of the Australian to US Dollar has been moving in favor of the US dollar. To a degree this is because the US Federal Reserve is tapering its quantitative easing program of bond and US Treasury purchases. This is driving up interest rates in the USA and would tend to reduce the value of the Australian to US dollar. However, a major factor in the value of the AUD is the strength of the Chinese economy as China is a major customer for raw materials as well as finished products from Australia.
In general a higher Chinese growth rate and especially the anticipation of a higher Chinese growth rate helps the AUD. A slowing Chinese growth rate hurts the AUD. We have noted that economic change in China may well be positive. To the extent that the Chinese real estate bubble bursts, manufacturing numbers continue to drop or massive amounts of bad loans destroy banks in China the AUD will suffer.
Higher Interest Rates in the USA
When interest rates go up money will follow. Japan has been stuck with extremely low interest rates for years and investors habitually converted strong Yen to weak dollars and took advantage of high US interest rates. When rates in the US fell these folks simply took their money back home. Now, as rates promise to rise in the USA investment and Forex capital is moving into dollars. The Fed action is hurting currencies around the world as the USD rises in value. This affects the Australian to US dollar relationship as well. However, our primary concern with the Australian to US dollar relationship does not have to do with a transpacific relationship but rather with Australia’s reliance on the Chinese market.
The Sino Australian Trade Relationship and the AUD
Australia commonly runs a trade excess with China of more than $20 Billion with total exports to China running well over $60 Billion. Both figures are in AUD. A trade excess is obviously good for Australia. Having a large customer for coal, oil, liquefied natural gas and iron ore has helped Australia prosper in good times and has tempered the effects of the recession. However, what happens if the Chinese economy bottoms out? Traders will be wise to avoiding going long for too long on the AUD for the time being. Or traders can use Forex options to hedge risk and still prosper from the ups and downs of the Australian to US dollar.