For the average person, the workings of the Australian economy means little. But to currency traders, following the Australian dollar, nicknamed the Aussie, could have led to tremendous profits rarely seen in the FX markets.
Over the past 6 months, the Australian dollar strengthened over 30% against the US dollar, from a rate of 0.6432 AUD per USD to currently 0.8417 AUD/USD. While this may sound unimpressive given that the S&P 500 rose close to 40% over the same span, forex markets are a completely different beast than equity markets. In foreign exchange, the standard leverage is 100:1, with some brokers offering up to 400:1 leverage ratio. For those unfamiliar with leverage, this means that the standard trader controls $100 in a currency trade with just $1 in his forex account. Analogous to levers in physics, financial leverage acts as a force magnifier on both the upside and the downside. Thus, unlike equities where giant swings in prices are standard, currencies rarely jump or crash in strength without significant external factors as seen in Australia.
Known mostly as a major commodities currency, especially precious metals, the Aussie considerably outperformed gold over the same time span, with gold prices nearly unchanged over the past 6 months. Two major factors contributed to the strengthening Australian dollar:
Signs of a global recovery in March
The effects of the signals of a global recovery are twofold. As international stock markets bottomed in March, bullish claims of “green shoots” guided general market sentiment from a negative outlook to a more positive outlook. Investors looked for any excuse to pump money into the market and shrugged off bad news for the most part. Risk appetite increased and investors who had previously loaded up on conservative assets and safe havens like the Yen and the USD were more willing to invest in higher-yielding, riskier currencies like the Aussie and similar currencies like the Canadian dollar (Loonie) and the New Zealand dollar (Kiwi).
Because the economy of Australia is heavily reliant on exports, much of its success hinges on the relative success of its main consumers like China and Japan. While China was still able to maintain GDP growth, albeit at a slower rate, Japan's economy was wracked by the the global downturn and both countries reduced the amount of imports over the span. Thus, as signs of market improvements are showing, investors are hopeful that countries will begin spending more, leading to higher trade that significantly benefits major exporting nations.
Strengthening Fundamentals
In the first quarter of 2009, when many other developed nations were posting negative GDP growth, the Australian economy surprised economists by posting a gain of 0.4% year-over-year growth. Economists polled expected an average negative 0.1% year-over-year growth. Shares of Australian stocks soared following the announcement and likewise, the Aussie strengthened against other major currencies as well.
Within Australia, numerous firms adjusted for a weakening global market well in advance and were prepared to absorb the steady decline in revenue with cost-cutting measures. In addition, Australian monetary and fiscal policies consistently changed to reflect the needs of the economy. Interest rates, known as the Cash Rate Target down under, fell from 7.25% in March 2008 to a record-low 3.00% in April 2009. Like many of its counterparts, Australia also enacted a stimulus plan that more evenly distributed the risks in the market.
As Reserve Bank of Australia assistant governor of financial markets Guy Debelle noted recently in Melbourne, “Monetary policy and fiscal policy is working and that's not necessarily the case in other countries, so the risks are more evenly balanced than they were.”
Combined, Australia may be the sole developed nation to have dodged the recession. And it is clear the forex market likes that.
