The Australian dollar broke through US$0.71 last night. The jump was sparked by a weakening US dollar, suffering from Core Durable Goods figures missing by -1.1%. What does this mean? Core Durable Goods is a leading indicator which shows changes in the total value of new purchase orders placed with manufacturers. If this indicator drops it means people are buying fewer goods such as consumer electronics or home and office furnishings.
However the climb was only maintained momentarily. After around 2:30 this morning the AUD started to retrace back to US$0.70.
Source: Forex factory
The party for a rising AUD may not be over. Mazen Issa, senior foreign exchange strategist, stated that ‘the durables report was the initial catalyst [for the AUD move] – it was horrendous.’ And there could be more to come. ‘The weak data did take the stuffing out of the dollar [USD], and it looks vulnerable to the downside,’ said Issa.
The AUD may enjoy another boost tomorrow, as US advanced GDP (Gross Domestic Product) figures are to be announced. But why would this help our own currency if US GDP figure were a miss? Slowing US economic growth would put downward pressure on their dollar. Thus strengthening the AUD against the USD.
And the possibility of this happening isn’t unbelievable. Jason Schenker, president of Prestige Economics, stated ‘It’s possible that US gross domestic product may decline, given the weakening manufacturing sector.’
A high AUD may be good for Australian backpackers, who could gleefully buy more while overseas. Yet for Australian commodities, a rising AUD may not be the best thing.
Why BHP and Rio want a low AUD
The global market place loves cheap commodities. What makes them cheap is not only their underlying price, but also the exchange rate cost that comes with it. For example if China wants to buy Australian copper, then they need to first purchase AUD.
If the AUD is relatively cheap at the time, then hey, the Chinese can afford more tonnes of copper. However if the AUD is more expensive then the opposite applies. And what happens when goods are too expensive? You shop somewhere else. And the Chinese, along with other countries, will do exactly that.
Australia is not the only mineral producing country. Yes we are rich in resources. For the early portion of the 2000s Australia’s economic growth was fuelled by minerals. But there are others out there who can provide resources at competitive prices.
Countries like Brazil compete with Australia ruthlessly in the iron ore business. Brazil produces 17% of the world iron. And if they can offer cheaper iron ore (exchange rate plus physical price) they could start to cut into Australian miners revenue.
So if you see the AUD dropping in the future, it might not be an accident. The Reserve Bank of Australia (RBA) has stated many times that they would like the AUD to stay low. And not just for miners. A lower AUD can also help spur investment across all sectors.
A Lower Australian Dollar could raise property prices
There are two things that the Chinese love. Baby formula and Australian real estate. The latter has been booming, reaching new heights in 2016. Australian property growth has dwarfed all others. From the graph below we can see how far ahead of the pack Australia really is.
Source: Business Insider
And a lower AUD could send Australian property growth even higher. Why? Again if the AUD is lower then it’s cheaper for foreign investors to buy Australian real estate. This is coupled with Australia’s very low cash rate (2%). It makes an Australian mortgage even more attractive to Chinese investors.
But the Australian dollar will never stay too low. Once it becomes more attractive to buy Australian assets, more foreign investors will demand the AUD. The simple act of buying Australian assets because they’re cheap will effectively raise the AUD.
Why? Simple supply and demand logic. If something is in high demand then the price will generally rise. If demand is low then the price will fall. But whether the AUD will rise or fall on Saturday is still uncertain.
There are some who believe US GDP figure will disappoint, giving a boost to our own currency. Yet no one can predict the future. Investors will just have to wait until figures on Saturday are released.
Junior Analyst, Money Morning
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