AUSTRALIAN DOLLAR RECOVERING

UNCLAS CANBERRA 000443 SENSITIVE SIPDIS STATE FOR EEB AND EAP/ANZ TAGS: EFIN ECON AS SUBJECT: AUSTRALIAN DOLLAR RECOVERING REF: 08 CANBERRA 1079 ¶1. (SBU) SUMMARY: The Australian dollar has fluctuated markedly over the past 6 months. After dropping nearly 40% between July and October 2008, it has recovered now to US$.75, a seven-month high. The recent appreciation of the Australian dollar suggests a return of some confidence in the global economy and some appetite for risk, and greater appreciation of the resilience of the Australian economy. END SUMMARY. RECENT ADVENTURES OF THE AUSTRALIAN DOLLAR ¶2. (SBU) The Australian dollar has moved dramatically over the past year. Beginning in early 2007, it crept up steadily against the US dollar and most other major currencies from its long-term average of roughly US$.72. In July 2008, it peaked at US$.985 cents, but then dropped almost 40% (27% in trade weighted terms) in under four months to a low of US$.605 in late October - the biggest sell-off since the Australian dollar was floated in 1983. (Reftel) Since then, improved sentiment in global markets has led to increased demand for the A$ which has appreciated 19% to US$.75 since late February 2009. The Aussie dollar is up 12% against its trade-weighted index and almost 18% against the yen over the same period. The Australian dollar - the sixth most heavily traded currency in the world - is typically closely linked to commodity prices and the outlook for major economies. RESILIENCE OF THE AUSTRALIAN ECONOMY ¶3. (U) So far, the Australian economy has resisted the onset of recession. Even if Australia is found to be in recession when the current quarter's growth figures are released, all observers such as the IMF agree that Australia's economic downturn has been less serious than in most other developed economies. Given the strength of the Australian economy, the plummet to US$.60 in October was more about decreased global confidence than Australia. The local currency has been boosted by a recent string of positive economic news. Retail sales, adjusted for inflation, rose 1% in the March quarter, helped by government cash handouts of up to A$950 to consumers in March and April. Australia's trade surplus expanded to A$2.5 billion (US$1.8 billion) from a revised A$1.75 billion in February 2009. Australia's official jobless rate fell to 5.4% in April and total employment rose. THE INFLUENCE OF MONETARY POLICY ¶4. (SBU) The recent strength of the A$ has also been underpinned by the decision by the Reserve Bank of Australia on May 5 to hold interest rates at 3% for at least the near term. The dramatic cuts in official interest rates between September 2008 (7.25%) and February 2009 put downward pressure on the Australian dollar. Now that rates appear to have stabilized, their relatively high level compared to the US and Japan help support the Australian dollar. ¶5. (SBU) COMMENT: The decline of the Australian dollar in 2008 tracked to some extent with drops in commodity prices. The recent rise, however, comes when commodity prices remain soft - and with Australia's top ones, coal and iron, looking to drop further. This reinforces the idea that the rise of the Australian dollar across the board is more a function of a return of global confidence and some willingness to speculate - to take some risks again. Investors looking for a foreign (non-US dollar) currency are likely turned off Qlooking for a foreign (non-US dollar) currency are likely turned off by weak economic performances in Japan, Britain, the Euro zone, and Switzerland. The Australian dollar is the next most heavily traded currency and also benefits from relatively high interest rates and from an economy less weak than most and showing signs of improvement. It has tracked very closely with the ongoing stock market rally on Wall Street, underscoring the link between the Australian dollar and international confidence. The concern, as one Sydney bank economist told Embassy, is that the Australian dollar is responding to a bear market rally; he predicts the Australian dollar will weaken again in the second half of the year based on an end to the rally on Wall Street. END COMMENT. CLUNE