The Little Aussie Battler

I am a fan of the Aussie currency, not because I come from this great land but basically cause for the most part it makes a lot of sense, it responds well to market fundamentals, but also sticks hard with trends if the data supports it. During the recent turmoil in International markets the Aussie was affected like all others as the unwinding of risk got into full swing, but what a bounce back through 2009, even in the face of risk aversion at the start of 2010 the aussie pairs are fighting hard.

One of the main reasons for this is China, unlike the canadian currency which seems to be geared only towards what happens in North America (geography I suppose) despite being one of the world's largest commodity producers they seem stuck with small growth as they try and recover like the USA. The Australian dollar is geared really only to one area and thats Asia and the monster that is China. Currently in Australia there are billions of dollars worth of projects being established and ongoing forms of government spending like the National Fibre Optic Network to new gold and other mineral mines, to the North West Natural Gas fields, there is so much activity in Australia, its easy to see why RBA Governor Glenn Stevens is bullish about Australia.

This weeks RBA announcment to keep interest rates on hold may have come as a shock to the media but its not out of character for the RBA, Glen Stevens is on the record as saying that he would like to see interest rates close to 5% by the end of 2010, when he made this statement in the second half of 2009 and quickly followed it with 3 consecutive rate rises the markets automatically started to price the Aussie like it was already at that level and the media assumed every opportunity they had the RBA would lift rates. My personal opinion of Glen Stevens is that he is a very measured and intelligent central bank governor which makes him somewhat rare amongst his pears throughout the world. It comes as no surprise that he has led the RBA down this path of 3 rises and then has adopted the wait and see approach.

The Aussie pairs have responded in a way I think is completely predictable:

1. The knee jerk reaction sell off when the news broke
2. The consolidation of this move as the market realised how bullish the statement was and the outlook for the future.
3. The steady climb which looks like it may start to happen

Now I hear all you saying but the AUDUSD has gone down since the RBA, thats true it has but this has only happened on the back of International Risk averse market plays not because the market believed the aussie was overvalued. When the fundamentals of this market settle down somewhat, the eurozone adddresses and fixes it issues, the US starts showing signs of an accelerating recovery, there will be only one way the Australian currencies will go and thats up.

China with 10% growth expected this year and officials having done the right thing by trying to reign in some of the excess liquidity in their market to prevent market and housing bubbles in the future, makes the picture look bright. It may not look like it at the moment but the Aussie should be a buy on dips for the forseeable future.