AUSTRALIAN DOLLAR (AUSSIE)

The Australian dollar, also known as the “aussie,” as a floating currency started in 1983.
Before that time, it was pegged to the dollar, and before that it was pegged to the British
pound. By floating its currency, the market sets the value of the currency and the central
bank can avoid the necessity of intervening by buying and selling dollars to keep the
currency value. But a floating currency also permits capital to float out of a country. The
fear of floating is great among totalitarian regimes and emerging countries that want to
maintain control of their economy. By looking at the aussie TWI (see Table 7.2b), we
can see that the aussie is affected by economic growth in all parts of the world and has
its trading relationships almost evenly distributed among Asia, Europe, and North America.
The role of Australia as a global trading country makes it an attractive currency to
trade.
The recent years of economic expansion have created strength in this currency. The
currency in 2006 had a strong upward trend, which, from a world trade perspective, remains
intact. The Australian dollar is almost as equally sensitive to the Japanese economy
as it is to the euro or the U.S. economy. We can even see that its neighbor New Zealand
can impact the value of the aussie because it generates 11 percent of Australia’s trading
volume (see Figure 7.1).
Important also to consider are commodity-related events such as movements in copper
and gold. Australia is a major producer of both of these commodities and is affected
by price patterns. Figure 7.2 shows the Australian dollar–U.S. dollar (AUDUSD) pair versus using the Goldman Sachs Commodity Index. We can see how the movements are
in sync, visualizing a strong correlation between commodity moves and the aussie-dollar
pair.
Figure 7.3 takes a closer look at how the aussie-dollar pair calibrated against copper.
It shows that in 2006, these commodities began to diverge down while the aussie continued strengthening. When a trader sees divergence from the traditional relationship,
questions arise. Why would the aussie continue to be strong if copper is weak? The
answer was that there was great strength in other sectors of the Australian economy,
making copper less important.
The fundamental personality of the aussie is that of a commodity- and tradedependent
currency. The aussie will be affected by global economic growth and, in
particular, Chinese growth. China is now the second largest buyer of Australian exports,
making the aussie more sensitive then ever before to the direction of the Chinese
economy.
A special feature of the aussie is that it has a multiple fundamental personality. It
can be considered an Asian currency, reflecting Asian growth, and it can be considered
a currency that also is impacted by the United States and Europe. This means that
the forex trader should seriously look to trade the aussie pairs such as the Australian
dollar–Japanese yen (AUDJPY) and Australian dollar–euro (AUDEUR), as well as the
traditional Australian dollar–U.S. dollar (AUDUSD) pair. The Organisation for Economic .

Co-operation and Development’s (OECD’s) Economic Outlook report summarized the
fundamental Australian picture as:
A pick-up in export volumes is likely to bring output growth gradually back up
above the trend rate of over 3% by 2008, despite a decline in the terms of trade and
a cooling of the business investment boom. Growth will, however, be held back in
2007 by the effect of a drought on the agricultural sector.
The cycle of growth that the aussie is in will be certainly tested. Events in China
and the commodity markets will be important factors to watch. Also, perhaps more significant over the coming year are events in Japan. If Japan raises its interest rates, the
aussie will suffer because the conditions for the carry trade will decline. The Japanese
rate of 0.50 percent and the aussie rate of 6.25 percent has encouraged a great deal of
investment flow out of Japan and into Australia. If this spread changes, so will the conditions
encouraging a stronger aussie.
Figure 7.4 shows why the carry trade has been persuasive. In recent years, it has
been very rare for the aussie to depreciate against the yen. This made the risks of an
unhedged carry trade very low. But the risk of carry trades providing a big decline
remains very real.
Domestically, the Australian economy entered 2007 with 30-year lows in unemployment
at 4.6 percent. The Reserve Bank of Australia increased rates to 6.25 percent to
help slow down the economy. At the end of 2006, inflation rates were at 3.9 percent, still
high for global standards and above the central bank’s target rate of between 2 percent
and 3 percent. The combination of domestic growth and global growth makes trading the
aussie in the coming years a lot of action.





By ABE COFNAS