This article is from the Australian Property Journal archive
The tenacity of the Australian spirit that was so vigorously displayed in Melbourne over the past 11 days has been left wanting in currency markets. The Aussie dollar stumbled to an 18-month low last week leaving many investors wondering if the spotlight on our attractiveness as a place to invest is starting to fade.
No longer light of foot, the Australian dollar limped home last week to finish at just US70.77 cents, a fall of 3.4%. This was not only the third consecutive weekly decline, it was the largest since December 2004. From its peak in March last year, the dollar has fallen 11%.
Fortunately, it is not just Australia’s place in the world that is on the nose of foreign investors. For the month of March, the Canadian dollar has slipped 3% and the New Zealand dollar has fallen 8% against the greenback. Indeed, the kiwi is off a massive 11% since the start of the year.
Just how low can the Aussie go? Historically, a move below the 70 US cent level is unusual. In the past 20 years, the Aussie dollar has spent most of its days trading between 70 and 80 US cents. A mere 23% of the time has been spent moving between 60 and 70 cents and just 15% of the time between 50 and 60 cents.
The mood of the dollar has become more volatile in recent years, however. The last decade has seen a sharp increase in volatility with the dollar spending 98% of the time moving between a wide range of 50 and 80 US cents. This compares with a narrower range of 65 to 85 US cents in the decade before. Daily volatility has also increased. The average number of days each year in which the dollar rose or fell 1% or more was 35 in the past decade. This compares with an average of just 19 in the decade before.
Why so glum? For one thing, the neighbourhood has lost its lustre given the state of the New Zealand economy. With growth there now negative, and the current account deficit reaching for the sky, the kiwi is quickly becoming the wall flower of the currency market dance. Some of this negative sentiment is rubbing off onto its high yielding Aussie neighbour. In the past 20 years, the Aussie and the kiwi have moved in lockstep with each other more than 80% of the time. In the past ten years the relationship has been even closer, moving together 97% of the time.
Another issue for the Aussie is that its attractiveness relative to the US is wilting. With US interest rates expected to be lifted for a fifteen consecutive time this week, the interest rate differential will be parred back to just 75 basis points – from 275 this time last year and 425 at its peak in early 2004.
Yet another cause of distress to the Aussie dollar in recent weeks is the re-emergence of Japan from its decade-long economic slumber. Prospects of a healthier, happier Japan mean the days of easy financing for Australia’s current account deficit are numbered. At some point in the future, if Australia still has a deficit of Godzilla-like proportions, it will need to offer incentives to attract foreign funding – such as a lower dollar or higher interest rates.
So much for the bad news! The good news is that global growth prospects still look bright and commodity prices remain elevated. Global growth is expected to come in above average for the fourth consecutive year this year, helped by stronger growth outside of the US. Still elevated commodity prices and the solid global back drop will continue to provide near-term support for the dollar. We expect the currency to rebound from these levels to finish the year at around US75 cents.
By Tracey McNaughton, senior economist with BT Financial Group.*
