The Australian dollar is on a roll. It has got 50 per cent stronger against the pound since autumn 2008 and touched a record high in early February. The surge has been driven by steady demand – and high prices – for Australia’s agricultural and mineral exports. Helping things along, the Reserve Bank of Australia’s (RBA) 4.25 per cent benchmark interest rate is one of the highest in the developed world. Together with the nation’s AAA credit rating, that makes the Aussie dollar popular with currency investors.
Some argue the Australian dollar has further to rise. Bloomberg quoted a portfolio manager at Adrian Lee & Partners as saying he would buy more, were it to weaken. Others believe it is overvalued. The new rba board member Helen Ridout has said there is “too much froth in the Australian currency”. For froth, read bubble.
Underlying the strength of the Australian dollar is the country’s trade surplus. In 2011 it averaged A$1.6bn (€1.3bn) a month and in December last year Australia exported A$1.7bn (€1.4bn) more in goods and services than it imported. Even in the absence of any other influence that implies a net purchase of A$19.3bn (€15.7bn) over the 12 months. Compare this with the position in the UK, where the £1.1bn (€1.3bn) trade deficit in December was the best result for nearly nine years. Simply on the back of international trade flows, people are selling sterling faster than they are buying Australian dollars.
And the UK economy is not growing as it should in the wake of a recession. Jobs are still hard to come by and wages are rising more slowly than prices. Investors claim to be worried that, by focusing on reducing the budget deficit instead of encouraging economic growth, the UK’s coalition government might be playing the wrong game. It makes them nervous about holding sterling. Yet at the same time they are worried that action by the Bank of England to encourage growth, through its asset purchase programme, will dilute the currency. That makes them nervous about holding the pound too. They do not actively shun the currency, but they aren’t out buying it either. In early February the pound was unchanged against the euro from its position before Christmas.
For five months the two currencies have been almost joined at the hip. The logic is reasonable enough: the UK economy is closely allied to the larger one in Euroland and, if the big partner sneezes, the smaller one catches a cold. As economic arguments go it is not entirely bomb-proof, but it appeals to investors – especially the older ones who have fond memories of making money from sterling’s ailments.
And things are still not looking great in the euro zone. Whatever the Athens government promises to the EU and the International Monetary Fund, and whatever the proportion of Greek government debt that its creditors agree to forgive, it is increasingly difficult to imagine how the country will be able to avoid a wholesale default. Greece has been in recession for five years and there is no sign of an upturn.
With fresh loans from the EU bailout fund and falling tax revenues, it is getting deeper into debt. The concept of a national bankruptcy looks greater today than it did when the scale of the problem became clear two years ago.
