Sunday, October 14, 2012

Australian currency problem - no link with commodity prices


The demand for Australian commodity products has declined, but there has not been a decline in the Australian dollar. Capital flows dominate trade flows. While the AUD has fallen into a range, it has not backed-up from its highs even with less demand for coal, iron ore, and other natural resources. Australia has been resource country of choice for the Chinese. With a slowdown in Chinese growth, there should be a spillover to Australia.

The export market has slowed yet the trade cycle does not seem to show a behavior that would be consistent with declining export trade flows. This is partially because interest rates are still high in Australia versus the rest of the G7, so capital flows dominate the trade thus keeping exchange rates high. The Australian economy should be resource focused but has now become a place to hold wealth at  differential of 400 bp on an unhedged basis. 

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