The Australian dollar hit a record high of around 85 euro cents overnight, as investors continue to flee the debt-stricken euro zone. So what’s driving the Aussie’s rise? And how long will it go on for?
Crikey hit the phones this morning to ask some of Australia’s leading economists and currency experts …
Michael Knox, director of strategy and chief economist at RBS Morgans:
It’s a very conventional economic reason and that is when you go back and look at the last quarterly GDP numbers, what you can see is that we’re experiencing a higher level of private sector investment because of mine building. And when that happens, when you have a higher level of investment, you draw in a higher level of capital inflow to drive that investment.
Whereas in Europe obviously they’re in recession or soft growth at best, which means investment is low and therefore capital flows into Europe for investment is soft. So if we’re having an investment boom and they’re having an investment slump, that’s primarily the reason that the Aussie dollar is strong relative to the euro. But it also tells you that, as our investment boom isn’t going to go on forever, their investment slump isn’t going to go on forever.
The fact that we’re also $1.04 (against the USD) suggests that it’s the strong conditions here (responsible for the strong currency), rather than the weak conditions in Europe.
Michael Workman, senior economist at CBA:
From a purely economic perspective, the relative growth outlooks between the two areas are quite different. That implies our interest rate structures are going to stay well above Europe’s for quite a while. And also relative returns, particularly for investors, although it mightn’t seem that way when you look at the sharemarket.
So that’s just a function of who we trade with, we trade mainly with Asia and the growth outlook there is quite strong. If you have the view that over the next five years 80% of world growth is going to come out of the Asian region and during that period, that the EU’s growth outlook is an increase of maybe 1% a year, then we look a better bet.
It’s looking pretty toppy at these kinds of levels, they are record highs. Aussie/euro is generally one of these crosses that tends to follow people’s views about world growth. So over the last three weeks there’s been clearer indications that China’s growth will not be as weak as some people thought in the market three to four months ago.
People were quite concerned about a hard landing in China. Some of the indicators lately have showed that growth, while easing there, is not going to fall significantly, particularly on the industrial production side. The Chinese central bank is also continuing to ease monetary conditions and settings so it has cut rates and it looks like it’s trying to expand credit growth. That was fairly good news for a longer-term view on where Australia sits.
Robert Rennie, global head of market strategy at Westpac:
It’s a very simple equation: look at the economic conditions in Europe. It’s been one of rolling sovereign crisis for years now and there has been a very slow response from officials. There is a summit and big promises are made, and then the crisis rolls on.
We forecast the conditions in Europe to stay the same through this year and into next year. The issue of government bonds is important. Germany, the Netherlands, Switzerland and Austria are all offering negative returns. In Australia, we offer bonds with two to three year yields at very attractive levels and that’s important to long-term, real money investors.
And our fiscal position is the envy of the G20. The dollar could well go higher towards 90 cents. In 1984, just after the Australian dollar was floated, we calculate that it was around $1.11 versus a synthetic euro. I’m not sure we will get there; that would be extreme.
Emma Lawson, senior currency strategist at NAB:
It’s two-fold, with the currency you’ve got look at both sides: and firstly the Aussie is holding up incredibly well. It is bid on the back of hopes for global quantitative easing and further monetary easing from many of the major central banks in the world that allow for higher beta trades. So you can see the effects that’s having on some commodity prices and equity markets as well, and this is supporting the currency.
You’ve also got a premium for Australia’s AAA demand which is causing the currency to hold up better than some of the more traditional factors would suggest that it does. On the other side of that you have the euro which is trading very weak. Obviously the European crisis has been around for a long time, but now you’re seeing signs of a slower economy right across the euro area not just in the periphery, and that is subduing the currency.
As well, you’ve seen they’ve cut interest rates so it’s less attractive to hold funds in euro. They’ve also cut on the deposit rates as well. So it makes it more of a funding currency than it was before, so you are seeing that divergence which is leading to a very high Aussie/euro rate.
We do think the Aussie dollar is holding up better than where it should be right now and it’s becoming less and less attractive to hold the more expensive that it becomes. We are looking for it to move a little lower over time. In the meantime, while the market is looking for more monetary easing particularly from the Fed, it can hold for the very short term.
Economic forecaster Frank Gelber:
I think the big question is why it took so long for the euro to decline. With our high commodity prices, we’re sheltered from the problems affecting Europe so you have to ask yourself why it didn’t happen much earlier.
This is really about the decline of the euro rather than the rise of the Aussie dollar. The euro is also falling against the US dollar. For a long time, people were focused on Germany — which is undervalued in the euro. Now they’ve let it slide. This hasn’t stopped; it’s got a lot further to go.
And yet it will mean it gets worse for our exporters, and more
unemployment in various industries that just cant cope with the
competitive overseas prices of imports.
It aint all beer and skittles.