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Friday, 02 August 2013 02:17

$AUD - it's still very strong

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MD_7The $AUD has come down dramatically against the $US in recent months, particularly when the US Federal Reserve started discussing the cessation of their money printing program.

While the reduction in the $AUD has been significant (from $1-05 to below $0-90 at the time of writing), when taken in the context of the last 30 years, the $AUD is still very strong as can be seen in the chart below.

HHL chart 1

Or looking at this another way, the $AUD has traded below $0-80 for 74% of the time since it was floated in 1983.

HHL Chart 2

 One of the drivers of the upward pressure on the $AUD was the fact that some global investors mandates specified that they can only invest in AAA-stable bonds.  Australia is one of the few countries that offer AAA-stable Government bonds which attracted significant flows of money into Australia.  Below is a list of the only countries in the world that can offer AAA-stable rated bonds:









This, plus an offshore diversification away from owning US bonds (due partly to their low interest rate, made artificially low by the US Federal Reserve) has led to a significant rise in demand of Australian Government Bonds (referred to as CGS in graph below).  But the demand has slowed significantly in recent times, which coincides with the drop in the $AUD.

HHL Chart 3

Another driver of the $AUD has been the carry trade (that allows foreign investors to borrow in a foreign currency and earn a higher rate of return investing in $AUD).  This also seems to be giving way.

As we have previously flagged, the path for the $AUD has changed and in speaking with many investment specialists we respect, the consensus view is that the decline of the $AUD has further to run.

This will benefit investors with exposure to International Shares and those Australian companies who derive income from foreign sources.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Read 879 times Last modified on Tuesday, 20 August 2013 03:14
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