Aussie dollar vs. US dollar

[archilles]

Guys one quick question that has probably been covered before, hoping someone can help me out as i'm new to finance and economics and need abit of schooling. This is my question

If the australian economy is stronger than the us economy , how come our dollar is soo weak ?

How come the we were getting around 90 US Cents for every dollar we traded ( afew months ago ) and now we're only getting around 60 - 70 cents for every dollar we trade ?

 

[GumbyLearner]

Re: AUSSIE DOLLAR VS US DOLLAR

Difficult question man!

Maybe Ben Johnson at the 88 Olympics could explain the current strength of the US Dollar??

Levitation? :error:

Dont worry man it will get smacked down eventually and heres a chart to peruse

 

[Glen48]

Re: AUSSIE DOLLAR VS US DOLLAR

I am assuming our IR is 4.5% ( until next month) and USA is 0% but the USD has to come down they owe to much loot and rising China is starting to bail up with lending them money. USA owes about 50 Trillion in real terms on a GDP of 14 Trillion ( was???)

 

[archilles]

Re: AUSSIE DOLLAR VS US DOLLAR

Sorry to be a pain man , but what is that chart all about ? looks very interesting

 

[aleckara]

Re: AUSSIE DOLLAR VS US DOLLAR

don't worry. the dollar will go back at least relative to the US dollar.

There are a number of factors why the US dollar is high (IMO the public debt bubble). None of them are sustainable in the long term. Hence the gold rally, and the start of an AUD rise now.

Besides at nearly 0% a lot of people will be borrowing USD now. This nearly 0% borrowing fee could easily change the nature of a lot of carry trades.

 

[theasxgorilla]

Re: AUSSIE DOLLAR VS US DOLLAR

When the herd becomes risk averse the AUD is sold down and depreciates. Global risk appetite high = appreciating AUD.

But within this you're going to have situations of over-reaction where momentum perpetuates and takes over from reason.

There are still some calls for AUD to hit USD $0.47 by middle of next year. Personally, I think they're idiots...at some point the relative strength of the Australian economy must become a factor for the exchange rate and I find it difficult to believe the Australian economy is in that bad shape.

Having said that, it wasn't in that bad shape that last time the currency went that low...it was that the herd was much more interested in something else. Namely USDs and dotcom. And the commodity cycle was around it's low.

 

[Panacea]

Re: AUSSIE DOLLAR VS US DOLLAR

If the australian economy is stronger than the us economy , how come our dollar is soo weak ?

There is plenty of discussion about this in previous threads, but I think the general response is that Australia's economy is heavily reliant on hard commodity exports, ie the resource sector. When the global economy contracts, commodity prices fall and this has a particularly pronounced effect on Australia.

There is also the 'flight to safety' issue, and the fact that the Greenback is the world's reserve currency. China and other emerging Asian economies (amoung others) have large US dollar currency reserves. Selling large amounts of US dollars would drive the price down and destroy the value of the their own $US reserves, so they are inclined to hold onto these reserves. This helps to hold the greenback up.

I'm fairly new to the global-macro stuff too, but I remember asking the same question a while back. These are some of the answers I got.

 

[archilles]

Re: Aussie dollar vs US dollar

thanks fellas, this certainly helps alot - more answers welcome

 

[gfresh]

Re: Aussie dollar vs US dollar

All factors above..

Other thing is the carry trade which allows borrowing in one low-yielding currency (usually yen), and investing in a higher yielding one (the $AUD).

The spread between them (difference between o/s interest rates and Aussie interest rate) usually encourages traders to purchase the $AUD. For a while we still had our 7% cash rate, while the US and Jap rates were falling rapidly, hence people purchasing a lot our dollars driving the price up to 90c+.

But of course as the RBA has slashed our rates, they've dumped the $AUD as a result. There is also the perceived risk of the $AUD - Australian economy crashing like the rest of the world, our country perceived as a primarily a commodity based country highly subject to crashing mineral prices, our high house prices, high household debt levels. We may look at these things differently locally, but from the outside looking in, that is what they see.

Other large factor is that hedge funds involved with a lot of this carry trade being wound up, or their clients requesting huge number of redemptions, so billions of dollars are being taken "out of the system". Hence they have to sell assets they may hold quickly, such as $AUD, or commodity contracts. So that's been a contributing factor.

That said, looks like things have started to reverse in the last month or so, and we're back now to ~70c. Mainly on the back of the true realisation that the US is screwed for longer than expected, and all these bailouts yes indeed are devaluing the $USD by the week.

Chart of $USD index is telling.. was holding up for a while, but now crashing against other currencies. Hence gold soaring as well by yanks trying to protect their own currency positions.

 

[sinner]

Re: AUSSIE DOLLAR VS US DOLLAR

Besides at nearly 0% a lot of people will be borrowing USD now. This nearly 0% borrowing fee could easily change the nature of a lot of carry trades.

Will they? Who is getting 0%? Nobody! Everyone but the banks is paying 5-9%! This is not Japan...

http://globaleconomicanalysis.blogspot.com/2008/12/quantitative-easing-american-style-free.html

The Fed is looking at the "benefits" of purchasing longer-term Treasury securities. The benefit is to banks who are front running the trade. Banks can now borrow from the Fed at the discount rate of .5% and invest somewhere out on the yield curve at a higher rate.

And as long as the Fed is not going to contract credit, banks can hold to maturity and pocket "free money". The odds of Bernanke contracting credit any time soon are essentially zero.

Bernanke hopes ZIRP will spur lending. But why lend in the middle of a recession with credit spreads blowing sky high and consumers walking away from mortgages, when you can borrow from the Fed at .5% and have guaranteed free money?

There is infinite demand for free money. But note that only banks can get it. Citigroup is not going to get a margin call from the Fed no matter how many treasuries it buys. You or I would get one in a flash if the rates went against us.

 

[GumbyLearner]

Re: AUSSIE DOLLAR VS US DOLLAR

Sorry to be a pain man , but what is that chart all about ? looks very interesting

Hi there archillies

Heres a summary of what that chart is about

www.youtube.com/watch?v=5IeixTAzhjE

www.youtube.com/watch?v=Kin1fxZAJZE

utthedoor:

 

[theasxgorilla]

Re: Aussie dollar vs US dollar

Other thing is the carry trade which allows borrowing in one low-yielding currency (usually yen), and investing in a higher yielding one (the $AUD).

The spread between them (difference between o/s interest rates and Aussie interest rate) usually encourages traders to purchase the $AUD. For a while we still had our 7% cash rate, while the US and Jap rates were falling rapidly, hence people purchasing a lot our dollars driving the price up to 90c+.

But of course as the RBA has slashed our rates, they've dumped the $AUD as a result.

I used to think interest rate differentials were the main driver for currency moves but I think risk aversion is a stronger driver at the moment. With the current differential between US and Aust rates you'd expect carry trading, but I think volatility and uncertainty trumps this factor right now.

 

[Temjin]

Re: AUSSIE DOLLAR VS US DOLLAR

Will they? Who is getting 0%? Nobody! Everyone but the banks is paying 5-9%! This is not Japan...

http://globaleconomicanalysis.blogspot.com/2008/12/quantitative-easing-american-style-free.html

Well, I'm borrowing USD @ 1.67% to buy US dominated gold and leave AUD cash. So that's a type of carry trade. heh


As for OP's question, AUD is generally regarded as a commodity currency and can be fairly correlated with commodity prices. So it's no wonder our AUD is so weak because we have had a commodity price crash recently. But commodities have strengthen over the past few days from extreme oversold levels.

 

[hotbmw]

Re: Aussie dollar vs US dollar

Temjin, which platform or broker did you use to borrow us$ at 1.67%?

cheers
Rob

 

[numbercruncher]

Re: Aussie dollar vs US dollar

Temjin, which platform or broker did you use to borrow us$ at 1.67%?

cheers
Rob

Yes please share

 

[Temjin]

Re: Aussie dollar vs US dollar

?? I thought you guys would know.

One of ASF's major sponsor of course. Interactive Brokers. (advertisement on top or bottom of this page, random)


My account uses AUD as base currency. But by default, when you purchase USD dominated shares (or other foreign currencies), the system would automatically "borrow" that foreign currency and use them to pay for the foreign shares. My AUD cash balance would remain the same and will earn benchmark interest minus 0.5% if the balance is maintained over AUD $15,000.

For borrowing, it's BMI + 1.5% and the BMI for USD right now is only 0.12%. Cheeeaaap! Soon I might actually have to pay to borrow their stupid fiat currency!

http://www.interactivebrokers.com/en/accounts/fees/interest.php?ib_entity=llc

 

[theasxgorilla]

Re: AUSSIE DOLLAR VS US DOLLAR

Dont worry man it will get smacked down eventually and heres a chart to peruse

In pondering your mortgage reset chart...at face value I conclude that the up and coming resets will have the end result of putting even more pressure on home owners in the US, henceforth the US economy and as a consequence the USD...returning us to a sustained devaluation trend.

Yet, at the same time the Federal Reserve is cutting rates like crazy.

What happens if resets occur when the interest rates on offer are (well) below the teaser rates? Not at all an unlikely scenario...and across a large part of the time frame shown in the chart, since the Fed have signalled their intention to keep rates low for a long time.