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.
Beijingâ€™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 Washingtonâ€™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
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
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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