Australian Dollar Forecast

Topics: Inflation, Foreign exchange market, United States dollar Pages: 12 (4159 words) Published: January 13, 2013
Australian Dollar Analysis


* The Australian Dollar is the currency of the Common Wealth of Australia, including Christmas Island, Cocos (Keeling) Islands and Norfolk Islands as well as the independent Pacific Island States of Kiribati, Nauru and Tuvalu. Within Australia it is almost always abbreviated with the dollar sign ($), with A$ sometimes used to distinguish it from other dollar-denominated currencies. It is subdivided into 100 cents.

* Prior to 1983, Australia maintained a fixed exchange rate. The first peg was between the Australian and British pounds, initially at par, and later at 0.8 GBP (16 shillings sterling). This reflected its historical ties as well as a view about the stability in value of the British pound. From 1946 to 1971, Australia maintained a peg under the Bretton Woods System, a fixed exchange rate system that pegged the U.S. dollar to gold, but the Australian dollar was effectively pegged to sterling until 1967. With the breakdown of the Bretton Woods system in 1971, Australia converted the traditional peg to a fluctuating rate against the US dollar. In September 1974, Australia valued the dollar against a basket of currencies called the trade-weighted index (TWI) in an effort to reduce the fluctuations associated with its tie to the US dollar. The daily TWI valuation was changed in November 1976 to a periodically adjusted valuation.

* On 12 December 1983, the Australian Labor Government led by Prime Minister Bob Hawke and Treasurer Paul Keating floated the Australian dollar, with the exchange rate reflecting the balance of payments and other market drivers.

* The Australian dollar is currently the fifth-most-traded currency in the world foreign exchange markets behind the US dollar, the Euro, the Yen and the Pound Sterling. The Australian dollar is popular with currency traders, because of the comparatively high interest rates in Australia, the relative freedom of the foreign exchange market from government intervention, the general stability of Australia’s economy and political system, and the prevailing view that the Australian dollar offers diversification benefits in a portfolio containing the major world currencies, especially because of its greater exposure to Asian economies and the commodities cycle. Foreign-exchange traders commonly refer to the currency as the "Aussie."

Key Economic Indicators:

1. Gross Domestic Product and Real Net National Disposable Income:

According to the Australian Bureau of Statistics Australia’s GDP stood at AUD 1,318 billion in 2011 while Real Net Disposable Income stood at AUD 1,101 billion.

The dip in GDP as well as Real Net National Disposable Income in 2008 is due to the Real Estate bubble, while the US was its epicenter things unraveled in Australia as well. Many commentators were extolling the idea that Australia’s economy had “de-coupled” from the United States and Europe, and would continue to be powered by the rapid growth of China and other developing nations. Concerns about inflation meant that interest rates were rising and many felt Australia would escape the incipient economic slowdown in the developing world. Events had instead unfolded differently.

Property prices rose at a similar rate to the United States and ever since 2002-03 the Australian household savings rate has been negative. When it came to the second phase of the crisis, Australia was not so lucky. Many investors held securities with direct exposure to the ailing US sub-prime mortgage-backed market. Two prominent casualties were high-yield funds managed by Basis Capital and Absolute Capital. As the crisis shifted into the liquidity phase, the impact on Australia intensified. Institutions that were heavily reliant on financing, particularly from offshore, found it more and more expensive to refinance maturing debts. Among the companies caught in the crunch were Centro, MFS, ABC Learning and Allco. Of course the biggest institutional...
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