Australian Dollar – the new Gold Standard?

May 20, 2011

FOREX

When I think about the Australian Dollar, AUD, against the USD and other currencies I reckon there are usually a host of things that influence the price that essentially can be distilled down into 4 or 5 key Drivers.

Over the years have developed a toolkit, or a way of analysing, where the AUD is, what’s driving it, and where its going. I summarised it a while back on our sister site MacroBusiness, you can find it here.

Important in my analysis is what I call “investment” fundamentals – its where the term FXMetrics came from. That is, as a traded asset, AUD is the 5th most traded asset in the world, and as an asset that trades volumes well above what its trade, size of markets or relevance deserves it is the drivers of investment decisions that are at least as important as raw economic fundamentals. Don’t get me wrong, economics is clearly important but it is the transmission mechanism between economics and how this translates to currency markets that I find the most interesting, and ultimately profitable, part of the analysis.

So I found it instructive amongst the Minutes to this month’s RBA Board meeting that the RBA referenced directly the purchases of AUD by other central banks. They can’t surely be buying AUD as 1.00 or 1.05 because they think its going to 1.20 or 1.25 rather I think they are buying it because it is a good safe place for investment.

Perhaps the AUD is the new Gold Standard Fiat Currency. 

Here’s a quick checklist,

  • Stable Political system (regardless of what you think about the current parliament),
  • Quality central bank managing an economy,
  • Relatively high  interest rates by current global developed world standards
  • A commitment to low and stable inflation
  • Proximity and access to Asia and the re-emergence of China and India
  • Fairly benign global investment environement – neither too hot or cold
  • Strong government financial position in terms of both Budget Deficit and net Australian Government debt

The list goes on but I’m sure you get the picture.

Anyway all of it says that we are probably going to have to get used to an AUD that has a much higher average over the next 5-10 years than what the Australian economy has been used to. It will pose challenges for companies who are exposed to this strength but opportunities for others.

Here is a blog I did over at MacroBusiness last night that was published this morning on the RBA’s approach to intervention. It’s easy to see with the above list why they are being circumspect even if a lower AUD would be better for industry at the moment.

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2 Comments on “Australian Dollar – the new Gold Standard?”

  1. Tristen Cosgrove Says:

    Brilliant. The Aussie dollar certainly appears to be a relatively safe place for global capital to concentrate. The Australian share market likewise. Australia could well be the ‘gold-standard’ access point to an emerging, or re-emerging China.

    Reply

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  1. Australian Dollar – the new Gold Standard? | Lighthouse Securities | Brisbane Real Estate - May 23, 2011

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