The Australian Dollar has its roots in the Japanese Yen. As the Japanese Yen continues to rise in Asia, the Australian Dollar’s trade direction has become a bit more complicated. This article will explain how the Australian Dollar may weaken as China is adding to the value of its currency while simultaneously trying to curtail speculation in its currency.
The Asian Development Bank, or ADB, recently released an economic forecast which expects the US dollar to stay relatively strong, thereby sending the US dollar up. However, the ADB was careful to state that it did not view the current strength of the USD as reflecting strength in the U.S. economy. Additionally, the ADB warned that the latest slump in oil prices may have negative effects on the US dollar in the long run.
Thus, the US dollar strengthens while the Japanese Yen weakens. This shift of emphasis is a worrisome one. To understand the implications of this move, one must examine the intertwined linkages between the Australian Dollar exchange rate.
In recent months, the actual power behind the direction of the Australian Dollar has become a little more complex. What has happened? As Chinese GDP growth increases and this makes its currency, the Yuan, more valuable, the ADB lowered its forecast for global GDP growth, from about 4.5% to about 3.5%. Some have observed that this actually cuts the US dollar’s value slightly.
But there is also a direct effect. As the US dollar rises against the Australian Dollar, this means that more goods are bought with the Aussie Dollar rather than the US Dollar. This tends to reduce the Australian Dollar’s value. For instance, if the dollar strengthens against the Australian Dollar and the Chinese Yuan appreciates in value, then the Australian Dollar will strengthen as well.
The increased purchase of Australian Dollars by Chinese customers will also have an effect on the Australian Dollar. The broader price levels tend to reflect a greater impact on the Australian Dollar’s direction as the dollar strengthens and the Chinese Yuan depreciates. For example, the dollar strengthens against the Australian Dollar but the Yuan becomes more expensive.
The increased purchases of the Australian Dollar from Chinese consumers and businesses mean that these individuals and companies are becoming more net importers as well as net exporters of Australian assets. If this trend continues, this means that the Australian Dollar may strengthen as China continues to increase its purchases of Australian assets.
As the trend continues, this means that China will continue to increase its total asset portfolio and the level of the Australian dollar will decline as its asset portfolio becomes more diversified. While the effects of currency changes on asset portfolios are still being studied, this is an important analysis because it may have an effect on the Australian Dollar.
Indeed, another analysis based on the trend of China’s asset portfolio suggests that China’s commitment to the Australian dollar may be weakening. There has been some speculation that as China increases its purchases of Australian assets, it will begin shifting from the Dollar to the Australian Dollar.
However, this trend has yet to be examined closely. The trend of asset portfolios seems to suggest that as China increases its purchases of Australian assets, the Chinese economy will be stronger than the Australian dollar strengthens and the Australian dollar weakens.
This will mean that the Chinese currency will strengthen in value in this country while simultaneously being purchased by Australians as an asset portfolio investment. Thus, although the ADB has taken a decidedly negative view of the current weakness of the US dollar and believes that a reversal is forthcoming, it appears that the Bank of International Settlements has moved in the opposite direction.