Aussie Dollar Rising Again

June 13th, 2014

Global growth forecasts have fallen in the latest World Bank report, with the world economy forecast to rise by only 2.8 percent over the next 12 months. This figure is down from the January forecast of 3.2 percent, with the World Bank mostly blaming the Russia-Ukraine crisis for the new weak outlook. According to investment bank Morgan Stanley, however, Australia's growth is set to buck this trend, with a higher dollar one of the inevitable consequences of a robust economy.

Comparatively high interest rates in Australia are encouraging global investors to pour their money into the Australian economy, with Japanese investors one of the biggest markets for Australian debt. Increased demand for Australian assets is putting renewed pressure on the dollar, which is on the rise again after falling to a low of 86.6 cents earlier in the year. Strong trade data from China is also affecting the Aussie, with official figures showing a larger surplus than expected in May.

The People's Bank of China recently reduced the reserve requirement ratio (RRR) - the amount of cash that commercial banks must hold in reserve - in an effort to encourage banks to lend more. According to National Australia Bank senior economist David de Garis, this move is “designed to provide reasonable and appropriate growth of money, credit and aggregate financing to promote stable economic operations,” in China, which also helps the Australian economy.

The Australian dollar is performing well against both the US dollar and Euro, with the local currency heavily dependent on the global economy. The weak state of the US economy is helping the Australian dollar to rise, with US real interest rates still in negative territory and Australian rates high by global standards. The Aussie also reached a six-month high against a weak Euro in early June, with the European Central Bank (ECB) recently announcing a range of policies to stimulate the region's economy.

While consumer sentiment suffered a big setback in May after the release of the tough federal budget, business confidence and global influences remain at play in the currency market. If trade data from China remains strong over the next few months and the US and European economies fail to strengthen, the Australian dollar will have support on a number of fronts and may just reach level pegging with the greenback once again.