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News Analysis: Strong Aussie dollar signals healthy economic recovery, too much appreciation not welcomed

English.news.cn   2014-03-29 08:38:50

by Jeremy Zhao

CANBERRA, March 29 (Xinhua) -- The Aussie dollar on Friday morning hit 92.72 U.S. cents, its highest level in four months and a level which makes exporters uncomfortable.

Many importers and exporters believe that their ideal level for the dollar is 85 to 90 U.S. cents. When the Aussie dollar rises over 92 cents, the competitiveness of exporters is weakened, according to a survey of Citi.

"An optimal exchange rate from a trade perspective is one where importers and exporters can both find some advantage. Now that the currency has appreciated beyond this level, we're moving into positive territory for importers and headwinds for exporters," Citi's trade and treasury solutions head Scott Southall said.

The preliminary PMI figures for March, which measure activity in China's manufacturing sector which were released on Monday, showed that the industry had slowed down for the third straight month. But the weak data from China just dragged Aussie dollar temporarily to 90.5 cents, from then on the Aussie appreciation rallied for four days.

It seems strange that in spite of recent price fall of iron ore, copper and weak economic data of China, the Aussie dollar continued to rise unaffected. The market logic read the whole thing the other way round. The traders are betting that China will roll out some stimulus measures to stabilize its economy.

Last week Chinese authorities approved five railway projects worth 142 billion yuan (25.03 billion Australian dollars). Surely Beijing wants a soft landing of the economy and any sharp drop of economic activities will hurt the job market and cause instability of the society, which is totally unacceptable for the Chinese government.

On Wednesday, Reserve Bank governor Glenn Stevens expressed positive attitude towards Australian economic outlook at the Credit Suisse Asian Investment Conference in Hong Kong.

"We are going to have a boom in residential construction over the next couple of years. That is very much on track," Stevens said.

He also said there was early, encouraging evidence the handover from mining to non-resources industries in the Australian economy was underway.

Clearly, Stevens is confirmed that his low interest and low exchange rate policy is working well, especially in the property market. Also he is not worried about potential domestic housing bubble.

"There are some people who think that Australia is in a bubble, " Stevens said, "You can never be 100 percent sure. But the price to income ratio has been around four times ... for about 10 years, so a very long-running bubble, if it is a bubble. Most do not last that long."

Stevens' upbeat speech pushed Aussie dollar even higher, although he still believes that Aussie dollar is too high.

"The long-running equilibrium of the exchange rate is probably lower and we have been quite consistent in saying that," he said.

While some analysts said the Aussie dollar could climb higher in the near future, the expected strengthening of the U.S. dollar as the American economy recovers and Fed tapering will eventually push the exchange rate lower.

"Stevens explicitly used the word 'welcome' for tapering in his speech. He is very much assuming that the U.S. dollar does strengthen on the back of that normalization of Fed policy, so this could just be a temporary bout of Aussie strength. Given some time ... the Aussie will come back anyway," said Westpac's senior currency strategist Sean Callow.

Editor: Shen Qing
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