Last Wednesday, the broadest measure of the Australian dollar’s value – the trade weighted index – hit its highest level in 28 years. The TWI ended the day at 79.9 – the highest level since February 1 1985.
The strength of the currency may come as a bit of a surprise as the Aussie hasn’t been soaring against the US dollar. In fact, at levels around US105 cents, the Aussie is still well short of highs above US110 cents set in late July 2011.
So what has catapulted the Aussie to new highs? In large part it has been the swift depreciation of the Japanese yen, the currency of Australia’s second largest trading partner.
Since October 2012, the Aussie dollar has soared 28% against the yen as Japan tries to depreciate its way out of economic mire.
Is the strength of the Australian dollar justified? Well certainly our economy is in far stronger shape than most advanced economies; our interest rates are relatively high; and we maintain a AAA rating from the three major credit rating agencies. And our ‘terms of trade’ (the ratio of export prices to import prices) is 67 % higher than 28 years ago.
Still the strong currency is keeping inflation low and creating problems for manufacturers, so the Reserve Bank will keep a rate cut up its sleeve just in case.
The week ahead
In Australia over the coming week, economic data is drawn from the “second shelf” – indicators like car sales and new lending data. However, minutes of the last Reserve Bank Board meeting are issued tomorrow. In China, economic growth figures are released today together with monthly activity data. In the US, there is a healthy spattering of data releases over the week.
In Australia, this week kicks off with new data on home loans, or more specifically, new commitments by lenders to people wanting to buy or build homes. Interestingly, while rates are low, budding home buyers remain cautious. Based on data from the Bankers Association, we expect that loans to owner occupiers (people wanting to buy or build homes to live in, rather than invest in) rose by 1.3%. But the value of all loans (owner occupiers and investors) may have actually fallen by 0.6%.
This article continues on page 2. Please click below to keep reading.