Australian dollar

The Australia dollar

The Australian dollar (AUD) recently traded at 78 cents against the USD. It is extraordinary that the AUD can remain above its long term average at a time when the prices of commodities remain very low. Just how high can the AUD go?

It is expected that since the AUD is a resource dependent currency, in the current economic environment its value should be closer to 60 cents against the USD. But as shown in the chart below, at its current value the AUD remains at about its mid-range for the last 25 years and as such it seems to be significantly over valued. AUDUSD AprilThe recent rise in the AUD is due in part to the weakness of the USD, where the USD index has fallen some 6% over the past 3 months. But the following daily chart which compares the AUD and the US dollar index shows that… Continue reading

The Australian dollar and the dilemma of the RBA

The Reserve Bank of Australia (RBA) has a dilemma. It seems that regardless of actions it takes to lower the cash rate, the AUD continues to rise and as recently as last week reached a high of 82 cents against the USD. There is a consensus that the current real value of the AUD is closer to 75 cents and that it should be expected to fall below 70 cents.

By international standards the AUD remains overvalued despite actions by the RBA to cut the cash rate. The main cause of this has been the recent declining value of the USD which over the past two months has seen the US dollar index fall by 7% from a value of about 100.

During 2010 and 2011, Australia reported consistent trade surpluses due to high prices of commodities but since 2012 the trade balance has been in deficit due to a… Continue reading

Expect further falls in the Australian dollar

The Australian dollar (AUD) has weakened considerably in the past few months and it is likely to continue to fall. Consider the following monthly chart of the United States Dollar index. The U.S. Dollar Index is the value of the USD relative to a basket of 6 major currencies. Much has been made of the recent rapid rise of the USD index but it can be seen from the chart that the index at its current level of about 95 is merely close to its long term average and considerably below its recent high of 120 in 2001 – not to mention its historic high of 165 (not shown) which it reached in 1983. USD indexWorld events suggest that it is very likely that the USD will continue to strengthen because the US economy is now quite strong at a time when the world economy is growing very slowly, interest… Continue reading

The Australian dollar and a bear market.

The Australian equities market is showing significant weakness compared to all major world markets. A recovery in the Australian market was expected considering the lead of stronger overseas markets, particularly in America but this has not happened and in fact Australian shares continue to fall.

The prime reason for our falling market is the weakening Australian dollar which is under pressure as a result of a very strong US dollar. Foreign ownership accounts for at least 30% of our market and with a weakening Australian dollar overseas investors are facing increasing losses and are selling Australian equities. This has mainly affected the blue chip stocks with the banks notably under pressure. The falling value of commodities, particularly iron ore has also had an adverse effect on the Australian dollar and with a falling Chinese demand for commodities it is likely that the Australian dollar will continue to fall and a… Continue reading

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