Today in Australia the RBA (Reserve Bank of Australia) made a fairly large statement, it became the first G20 to raise rates. This short article gives a pretty good explanation of why the RBA felt the need to raise the rates.
http://www.cnbc.com/id/33191494
I have been a big investor in the Australian dollar (via FXA), and of course am very happy to see this. Not only does it bump up the distribution of FXA (which has taken a beating as their rates dropped), but it also creates more money-flow to Australia. The 'carry trade' has long been a favorite of the Japanese, mainly because of their near zero interest rate. In this case I think the Australian dollar could stand to be the new beneficiary of a new 'carry trade' that once was a standard Yen to USD.
A few more rate hikes in Australia will bode well for the distributions of FXA, and will likely boost the value of the Australian dollar at the same time. This will be due not only to the rate increases, but a steady flow of currency investors and people seeking high rate CD's. You only have to go back 2-3 years to find a time when Australian banks catered CD's for foreign investors. Their high interest rates attracted funds from all over the globe.
I think this is a very good sign for the Australian market as a whole (EWA), partially because some of the new inflow of money will end up there. I currently hold shares of the Australian mining company Fortescue Metals Group (FMG/FSUMF). The stock has been hit hard by the pull back in commodities prices and lower demand, however I think its positioned to do quite well when the Asian economy fully recovers.
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Demise of the Dollar
ReplyDeleteLets be honest, before the global economy hit the skids in mid-2008, the dollar was already in trouble. The dollar was almost in free-fall against the Canadian Dollar, Australian dollar, and the Euro.
In 2008 the USD gained on the Euro (from $1.575 in July) in August, September, October, and November ($1.274 in Nov) before giving a bit back in December. The Euro has climbed month over month in every month since (except for Jan to Feb 09) and is all the way back to $1.462.
In 2008 the USD gained on the Australian dollar from $0.962 in July all the way to a $0.659 in November. However after a small Jan09 to Feb09 drop off the USD has lost ground, from $0.648 in Feb up to the current rate of $0.879.
The British pound had a similar trend.
Then there has been the rumors of oil being decoupled from the USD and going to a currency basket. Lets be fair here, you can understand why valuing such a widely used commodity in USD is questionable in the eyes of countries like China. If China meets its aspirations, they will have more to do with the price of oil than the US, so why keep the price in USD? The answer has been the stability of the USD, and my figures above seem to indicate that the USD showed strength in the worst of economic times... However, it was strength relative to its enormous weakness in 2007 and the first part of 2008.
I think the rest of the world in losing faith in the value of the USD. I would point to the current run-up in gold as proof that the USD is continuing the weakness of 2007 and early 2008.