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The Dollar

Discussion in 'The Economy' started by bennymarsh, 17th Oct, 2008.

  1. bennymarsh

    bennymarsh Well-Known Member

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    Does anyone have a good explanation of why the Aussie dollar has gone down so much against the US dollar when our economy is obviously in a much better state than the US? ie higher interest rates

    :confused:

    Thanks. Ben
     
  2. AsxBroker

    AsxBroker Well-Known Member

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    Hi Benny,

    Expectation of interest rates dropping.

    You can see below that there are strong expectations of yields dropping another 1.8% pa over the next 12 months...

    Inverse yield curves...

    2 to 3 months 6.8% pa
    5 to 6 months 6.3% pa
    10 to 11 months 5.5% pa
    12 months 5.0% pa

    From Wikipedia:

    Inverted yield curve
    An inverted yield curve occurs when long-term yields fall below short-term yields. Under unusual circumstances, long-term investors will settle for lower yields now if they think the economy will slow or even decline in the future. An inverted curve has indicated a worsening economic situation in the future 5 out of 6 times since 1970. The New York Federal Reserve regards it as a valuable forecasting tool in predicting recessions two to six quarters ahead. In addition to potentially signaling an economic decline, inverted yield curves also imply that the market believes inflation will remain low. This is because, even if there is a recession, a low bond yield will still be offset by low inflation. However, technical factors, such as a flight to quality or global economic or currency situations, may cause an increase in demand for bonds on the long end of the yield curve, causing long-term rates to fall. This was seen in 1998 during the Long Term Capital Management failure when there was a slight inversion on part of the curve. (Yield curve - Wikipedia, the free encyclopedia)

    Cheers,

    Dan

    PS Quotes are from St George Bank Term Deposit rates as at 17/10/2008
     
  3. bennymarsh

    bennymarsh Well-Known Member

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    So currency rates are priced in a similar way to long term bonds?

    I'm still not sure how that makes sense given the US bailout will have caused a huge amount of US gov bonds into the market over the long term which i would have thought would bring US bond prices down?
     
  4. AsxBroker

    AsxBroker Well-Known Member

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    Benny,

    Quote me on "interest rates dropping" as opposed to what I previously said about "expectation of interest rates dropping" for spot rates, with forward rates the future interest rate expectations need to be taken into account.

    Current rates are fairly priced (and extremely liquid, daily volume in April 2007 was US$4 trillion), obviously any changes will affect the AUD/USD rate.

    I don't know how many bonds the US have issued. What you are wondering about is the Interest Rate Parity (Interest rate parity - Wikipedia, the free encyclopedia).

    Basically it is saying, as interest rates in Australia have dropped (SGB was offering 8.6% for 12 months back around May 08 [which was 5 months ago] and now offering 5% for 12 months) in Australia and interest rate expectations have also dropped significantly.

    Compare the current 5 to 6 month rate of 6.3% which matures in end Apr 09 to the earlier 12 month 8.6% which would mature in May 09. Very similar maturity months though the current rate is 0.72% of the May rate (6.3%/8.6%).

    Multiply this figure by our AUD/USD at the high point of around 0.97 and you get the current rate AUD/USD of 0.6984 (using our figures) and Currencies - Currency Converter & Latest Rates at CNNMoney.com is quoting 0.6943/0.6948 which is pretty close.

    Cheers,

    Dan
     
  5. Billv

    Billv Getting there

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    Falling commodity prices and the fear affecting carry trade.

    I feel that our interest rates will stay above those of other western currencies and therefore when fear goes away the carry trade will resume.

    Forex News - Yen rallied on strong carry trade unwinding as risk appetite fades
     
  6. Billv

    Billv Getting there

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    Is The FX Carry Trade Dead?

    The Future Of The Carry Trade
    It’s no secret that the Bank of Japan has disliked its Yen being the funding currency of the carry trade for all these years. They have claimed that this has kept their currency artificially low and has damaged their economy. But, despite their best efforts, they haven’t been able to stop the global market.

    My opinion is that the carry trade will always exist as long as a decent interest rate differential exists. No amount of global and exchange rate risks will stop some crazy traders looking for a quick buck. But the global world is changing with the banking crisis we are now going through. Risk departments and regulation may clamp down on these very risky trades. The financial world is de-leveraging. It looks like the carry trade may have a much smaller role in the future.
    more
    Paddy Power Trader Blog » Blog Archive » Is The FX Carry Trade Dead?
     
  7. bennymarsh

    bennymarsh Well-Known Member

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    I just found this article yesterday.

    Aussie's slide from parity to parody

    Dollar dive: 40 US cents warning

    October 28, 2008
    From parity to parody, the Australian dollar has collapsed from nearly matching the US dollar in July. Here are the key reasons for the historic slide, which has the dollar teetering above 60 US cents and near its lowest levels ever against the yen.

    Risk? No thanks.
    Australia's relatively high interest rates drew investors, especially from Japan, to sink their hard-earned into Aussie dollars. When the dollar dropped, however, those gains were wiped out, scorching investors who won't be back soon.

    Commodity prices crumble.
    Commodities account for about half the country's exports. All good when their prices are rising, but a drag when they aren't. Iron-ore and coal are the two biggies in value terms, and prices for both are set to be slashed at coming meetings with Chinese and other Asian buyers.

    Yawning deficit.
    Australians have been buying more from overseas than we export for years. When dividends and debt repayments are taken into account, the gap is among the largest in the world. As a share of the overall economy, Australia is down there with Spain, Greece, Turkey, South Africa and Pakistan

    Follow the herd
    Why buy now if you think it will be cheaper tomorrow? That's the question plaguing markets from real estate to company shares just about everywhere. And the same applies to the Australian dollar.

    Circuit-breaker: the Reserve Bank
    The RBA has 'intervened' twice in recent days to stop or slow the dollar's slide. That means it's been buying Australian dollars, but also signalling to traders that dumping the dollar is not a one-way bet. The question is whether the RBA's bite is big enough to match its bark.

    BusinessDay