It could be argued that it has been a terrible month for the Aussie. The economy down under is clearly slowing, there is speculation that the RBA might even lower rates before the end of the year, house prices are declining, some of the world’s major advanced economies may be lurching back into recession and investors have suffered a risk aversion relapse. The DAX for instance is down a staggering 21% for August, whilst many other major bourses are down more than double digits (in percentage terms).
And yet despite all of this seemingly bad news the AUD has lost only 2.5% against the dollar this month, and is down less than 3% against the euro.
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That said, it must be conceded that it has been a rocky time for the Aussie – it briefly fell more than 10% to below parity at the height of the panic three weeks ago, but has since recovered a lot of the ground it lost and touched 1.07 overnight.
For those who believe that the Aussie dollar remains a sound long term bet, this price action could be regarded as impressive. During similar past episodes of market meltdown, the decline has usually been much greater and more prolonged.
Also, the Australian currency still pays a decent rate of interest, fiscal policy is in sound shape and the economy’s natural resources are still in huge demand, especially by Asia. The Aussie remains a very expensive currency, but with the other major currencies being deliberately debased and their economies stuck in the mire, many investors still appear to have a favourable view of the currency.
Michael Derks, Chief Strategist