“The Australian dollar is considered a barometer of global risk appetite. Its fall reflects the quick change in mood, as Europe’s debt problems and China’s monetary tightening plans cloud expectations for the global economic growth,” summarised one analyst.
Over the last month or two, investors have become increasingly anxious about the potentials that are held with carry trades, and the Aussie Dollar is one of the majors in this field.
As the Euro crisis deteriorated, so financiers withdrew their funds from carry trade economies, which included Australia, New Zealand and Canada.
Ironically, this movement caused a fleeting upswing in the Euro at the expense of the Australian Dollar.
However, this doesn’t prove that investors have more confidence in the Euro, it actually only shows that the markets are wanting out of risk, and therefore selling the Aussie in bulk. Out of the last 10 business days, the Australian Dollar has lost ground in 7 of them.
The recent turmoil in global markets has led economists to price out any chance of another rate increase from the Reserve Bank of Australia, and some are even speculating that there may be a rate cut.
The overall expectation is that the RBA will lift its cash rate by another 2 hikes by the end of the year. Australian employment increased by 26,900 in May, and Prime Minister Kevin Rudd says the latest positive employment data means that Australia is outperforming every other advanced economy in the world.
The Australian Dollar closed last Friday at 1.732 against the Pound, at 0.129 against the Japanese Yen, and at 1.427 against the Euro.
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: Note: The above exchange rates are based on "interbank" rates.
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