by Christian Edwards
SYDNEY, Feb. 5 (Xinhua) -- A strong return to form this year has consolidated the once-fragile Australian dollar (AUD) and brought into sharp relief Australia's close correlation to the Chinese economy.
In April 2001 an Australian dollar represented just over 0.40 U. S. dollars, today the "pacific peso" has been straddling parity with the greenback now for almost two years, hitting above 1.10 U. S. dollars in 2012. For ten years closer trade links with China have lifted the "Aussie" by orders of multitudes. Today it sits well above parity with the greenback.
The Australian dollar is tied to China's economy through the burgeoning trade ties between the two countries. In fact the Australian dollar began its rise with the tide of foreign investment from the China-driven mining boom, but commentators including HSBC's Paul Bloxham have forecast mining investment to peak by mid-2013, leveling out thereafter.
Last year Chinese-Australian trade nudged over 120 billion Australian dollars, making China easily Australia's biggest trade partner.
The surprising result has not only been the amplification of the power of the Australian dollar both as a tradable currency and a safe haven, but according to Chris Weston, chief Market Strategist at IG markets, the Australian dollar is often used as a proxy for the symbiotic economic relationship. "Many global markets traders see the AUD as one of the best ways to express their view on China," Weston told Xinhua. "This is predominately driven on the basis that China consumes just under 30 percent of all of Australia's exports (with Japan the next key destination at 17 percent.)"
Research from the Australia China Business Council (ACBC) shows that, last year trade with China represented a windfall to each Australian family to the tune of 10,500 Australian dollars. China' s rise, while bringing benefits to Australia's economy and currency can also be interpreted as the rise of the Australia dollar.
Weston said, "China's demand for Australian products affects not only growth, it also has a major impact on monetary and government policy as well."
The blowback for Australia is that most of its economic eggs are in China's basket. Iron ore represents the greatest share of Australian exports to China. Shifts in the production and distribution of this single commodity has been evidenced to send cold shivers through the spine of Australia's economy and currency markets.
When China's voracious appetite for steel stalled during the 2012 slowdown, Australia's central bankers started grabbing their woolies. The recent slowdown in China's economy was directly responsible for the dramatic decline in the price of iron ore and therefore Australia's terms of trade. This has led the Reserve Bank of Australia (RBA) to repeatedly cut interest rates, as well as scale back its forecasts for GDP growth.
In addition, it also means Australian Treasurer Wayne Swan no longer expects to balance the budget a core promise for his labor government, in this an election year. Strategists like Chris Weston are bullish that should China achieve a predicted growth around 8.1 percent, equity markets push higher and the risks around European settle and then the dollar could well hit post- float highs.
"The RBA generally always mentions China in its statements, and it will clearly be taking heart at the stabilization seen.. If the bank does surprise economists and leaves the cash rate at 3 percent this year, there is a real platform for the currency to progress - despite the AUD being the single biggest headwind to the economy as it pushes toward the post-float high of 1.10 AUD."
On the upside, Chinese demand ensures Australia remains among the handful of nations clinging to a AAA credit rating from all three credit rating agencies, and trade ties between the two neighbors look set to deepen.
Critically, China will allow the Australian dollar to become only the third currency to be directly convertible into the RMB, making the cost of business lower and further binding the economic union.
However, external threats continue to loom large in a changing global economic environment. Liquidity, flooding into markets, remains a constant threat for both the RMB and its Australian partner.
The new Japanese government under Shinzo Abe unleashed a titanic a 10.3 trillion yen fiscal stimulus package on Jan. 11. Backed by official and private quarters, the figure is expected to expand diametrically pouring equity into global markets and stifling the yen.
Paul Bloxham, chief economist of Australia and New Zealand HSBC, told Xinhua that these moves from developed economies are directly aimed at currencies like the RMB and the Australian dollar. "It's a tricky position to be in with the developed world pumping a lot of liquidity into the system and trying to drive down their currency that puts pressure on the RMB. It means that the economy is less internationally competitive simply because of the currency so its a tricky environment to be in but China's not alone - Australia's in that position as well," He said.
And this is the painful reality for Australia's "two-speed" economy an economy driven by resource exports to China that subsequently drive up the dollar, stifling key sectors from retail, manufacturing and tourism. In fact the Australian dollar is expected to face a "difficult year" on the back of weak domestic factors and a warming of international markets, according to the latest report from HSBC. "We expect it to be a difficult year for the Australian dollar," HSBC notes in its latest global currency outlook.
"This year we believe the combination of a 'risk off' environment and a deteriorating fundamental outlook will see the Australian dollar again underperform."
However most currency analysts failed to pick the rapid stabilization of the Australian dollar thanks in part to its role as a safe haven and in part thanks to the regulatory stabilization provided by Chinese officials and the People's Bank of China (PBOC) during a transformational year for the Chinese economy.