Some say that markets are overreacting and that the Aussie is overvalued relative to the outlook for the global economy. Needless to say, many market players (including experts!) are scratching their heads at the Aussie’s rally. What in the world is keeping it afloat?!
1. Foreign investment
One of the reasons the Australian dollar has been in high demand is because foreigners have been looking to cash in on Australia’s booming mining industry. Of course, we all know that in order to buy stocks and provide capital for these mining cash cows, they must first buy up Australian dollars!
But it isn’t just the mining industry that’s drawing foreign attention. Rumor has it that Japanese investors have been looking to get a piece of Australia’s domestic mortgage market. This strong, steady inflow of capital into Australia could be one of the factors propping up the currency right now, and it might continue supporting the Aussie down the line.
2. Global supply of investment grade debt
The Aussie has also been benefitting in the wake of the many debt rating downgrades that we saw in the past year. As a result, the global supply of investment grade debt (a fancy term referring to highly rated debt or debt that has a relatively low risk of default) shrank!
To put things into perspective, there was 123 billion USD less investment grade debt underwritten in 2011 than in 2007 in the U.S. On the other hand, Australia’s investment grade debt was mostly unchanged.
So where do portfolio managers go if they want to get their hands on some investment grade debt? Australia!
3. Aussie as an Asian safe haven
While the Australian dollar may not be on the same level as traditional safe haven currencies such as the U.S. dollar and Japanese yen, it is definitely a good alternative, at least in Asia. The general perception is that investments in Australia are safer than those in other Asian nations.
The ANZ Bank expects that this type of money allocation will continue for the next five to ten years as global deleveraging continues.
All in all, though the Australian dollar’s strong rally is a bit surprising, it isn’t completely unjustified. With both private and public individuals and institutions directing money to the Australian dollar on the grounds of broadening their portfolios, it is likely that the currency will continue its ascent up the charts. Like it or not, it looks like we’ll just have to get used to the Australian dollar at these levels!