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Tuesday August 4, 2009 - 16:21:33 GMT
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An Asian Affair: Commodity Currencies and China

 The rise of the Australian and New Zealand Dollars from the depths of March to their current levels has been an Asian success story.

Chinese economic growth has cushioned the effects of the worldwide recession in New Zealand and Australia. Both countries export large amounts of raw materials to Asian manufacturing centers, China foremost. The yuan is fixed to the dollar (unofficially) the aussie and kiwi are not. The Australian economy has avoided recession; the New Zealand economy shrank just 1.0% for two successive quarters. As China returns to strong economic growth and the potential for internal unrest diminishes, the two Asian Dollars rise, and everyone in Asia benefits.

China has boosted her GDP growth from 6.1% in the first quarter of 2009 to 7.9% in the second. Beijing’s four trillion yuan ($587 billion) stimulus has produced tangible results. The Shanghai stock exchange is booming, bank loans and credit are flowing to business and consumers, property markets are hot again, and car sales have overtaken those of the United States. The Chinese government, spending money it actually has, is courted by Washington’s debtor politicians who proclaim their belief in a strong dollar and fiscal rectitude lest Chinese officials withdraw their support for US deficits. The strength of the Chinese economy is imparted to her trading partners and material suppliers Australia and New Zealand, and their currencies rise against the dollar and the moribund American economy.

The additional success of these two commodity currencies is owed largely to the dynamism of the Chinese economy. Without the demand from the mainland, the miners and ranchers of down under would have few places to sell their products. Though the fall in the Antipodean currencies last year had everything to do with the American dollar, the climb back has been, to a large degree, an Asian affair.

From last summer until this past March the Australian and New Zealand currencies had suffered the same precipitous decline against the dollar as did every major currency except the yen. Panic buying of American Dollar assets trumped every financial and economic consideration during the prolonged financial turmoil. For the six months following the collapse of Lehman in September neither the aussie nor the kiwi sustained any appreciable rally.

However, since the recovery in world financial markets that began in March these two currencies have gained more than twice as much against the dollar as the euro. From March 4th to June 3rd the euro improved 14.3% against the US Dollar. In that same period the Australian Dollar gained 31.4% and the New Zealand Dollar 34.1%.

Traders, portfolio managers, investors, fund managers, almost everyone who had sought safety in the States and Treasury investments began in the second quarter to seek higher returns outside the United States and largely outside the industrialized world. A portion of the improvement in all currencies versus the dollar was due to this repositioning of assets to more favorable economic environments.

The most favorable of all the destinations, by performance, fiscal ability and government intention was China. Of the major trading currencies the Australian and New Zealand economies have the closest economic connection to China. If China grows by exports or domestic consumption the benefit to the Australian and New Zealand economies are direct, substantial and evidenced in the comparative performance of the two economies.

Japan also has large interests in the China. But the Japanese economy is a special case due to its dependence on exports and limited domestic consumer consumption. The yen also has had unusual contingencies that have given it undue resilience, primarily its decade long participation in the carry trade and the collapse last fall. Nevertheless one of the reasons for the continued yen strength is its Chinese relationship.

The Chinese stimulus was announced in November of last year but its success was not apparent until the recent release of the second quarter GDP numbers. But the advantage to the Australian and New Zealand Dollars was already priced in by the beginning of June.

Further improvement in these currencies will hinge on continued Chinese expansion. The quality of the economic growth in China is open to speculation. Some of the markets, particularly equities and housing, have bubble like aspects to their rise. Bank loans and credit expansion have been overwrought. Mere concern that the government might tighten credit was enough to cause a five percent fall in the Shanghai exchange.

If the Chinese economic recovery is solid, if it is not grounded in misplaced credit generation and speculation, then the aussie and kiwi have a stronger immediate future than any other major currencies. If China cannot sustain her current growth then these commodity currencies will quickly fall to earth. Either way the Australian and New Zealand economic futures will be written in Beijing and not Canberra or Wellington.


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