Australia in no hurry to weaken its dollar

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Consistent with the laid-back cultural dynamic that so distinguishes the national character, the Reserve Bank of Australia appears to be perfectly happy with its extremely strong currency. In a speech delivered earlier today, RBA Deputy Governor Lowe claimed that "it is difficult to make a strong case that the exchange rate is fundamentally misaligned," because it is essentially consistent with the "boom" -- the relationship between export and import prices in terms of trade. As a result, Lowe contends that "the hurdle for intervention is quite high". For international investors and traders, this hands-off attitude towards the Australian dollar (FXA, quote) is a major attraction. In the major advanced economies, central bankers have been deliberately debasing their currencies for some time. Moreover, some have been prepared to undertake massive intervention to prevent additional currency strength. Even better for those looking for some yield, the Aussie again found itself under pressure overnight as Q4 GDP data came out much weaker than expected. The Australian economy expanded at a quarter-to-quarter rate of 0.4%, compared to expectations of 0.8%. The previous quarter was also revised lower. The data showed Australian household consumption rising at the slowest pace for nearly two years. Meanwhile, the softer housing market saw a sharp fall in housing construction, which took 0.2% from the headline rise in GDP. This is not that much of a surprise, given the pull-back in house prices seen so far this year. One of the main implications of this data is that it is the domestic economy that appears weak. Net exports improving marginally in the quarter. So, for now at least, the fear that Australia is "vulnerable" because of its dependence on raw material exports to the rest of Asia (particularly China) may be secondary to concerns over the domestic economy. In a similar vein, the data remind us that Australia is more than a proxy for China and there is no doubt that the chances of an RBA rate cut in one of the two upcoming meetings has increased. This will further undermine the Aussie's yield premium over many of the funding currencies, such as the yen, euro and U.S. dollars. Indeed, given what we have seen on the other high yielders over the past week (Brazil, Kiwi, Turkey), this has been the worst week for carry trades so far this year. A simple basket of the four "yield" currencies funded via yen or Swiss francs is down nearly 2% since Friday, having gained nearly 10% so far this year. But as we saw with weak Brazilian GDP yesterday, the macro moves are not just driven by global risk appetite, but domestic factors as well. by Simon Watkins for Emerging Money



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



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