Tuesday, November 11, 2014

Aussie dollar downtrend continues | Victims of their own success?

As can be seen from the monthly chart above, the Australian dollar against the US dollar continues to make lower highs and lower lows. While the 0.80 level is hoving into view, coinciding as it does with an important support level dating from 2010 and the 200 month SMA, not to mention the fact that 0.80 is a nice round number, it should also be noted that the pair is close to the bottom of a trend channel.

This fact alone will be of abiding interest to market participants. There is every possibility that the pattern will continue, providing a retrace to the upside in the process. While the fundamentals certainly support a weaker Aussie, these things are never that simple and price never, ever goes to where it is destined to go in a straight line.

Victims of their own success?

In fairness to the Australians, in many ways they have become victims of their own success with regard to the Aussie dollar. On the one hand they wish to have a lower currency unit in order to assist exports, while on the other they have proved adept at managing their economy through thick and thin in an exemplary manner, which has the natural consequence of raising its value.

True, the country is blessed with many natural resources, but other parts of the world have failed to achieve equitable distribution of the benefits of such as this, and have not been able to translate it into the high living standards that exist in Oz.

And now Australia appears to be on the cusp of achieving another economic first, which seems to be coming just in time to assist with the economic transition that is required in the wake of the collapse in commodity prices and the downturn in mining. This is a free trade agreement (FTA) with China. Ten years in the making, it will enable trade in those areas outside of commodities, which were capable of being sold into China in the past because, well, the Chinese wanted and needed them.

There are still a number of sticking points. Australia has restrictions on the purchase of pre-owned residential property by non-Australians, and the Chinese want these removed. The cost of labour in China is very much lower than it is in Australia, and local trade unions and the Labour Party are determined to make sure that Chinese workers coming to the country under the FTA will enjoy the same employment benefits, and therefore cost as much, as Australian workers. The Chinese are looking to have issues that arise in contracts made under the agreements settled under international law, whereas the Australians would, naturally, prefer to make all such agreements subject only to their legal system.

Notwithstanding these matters, so pleased is the Australian government with the progress that has been made with China so far that it is now talking about a similar deal with India.

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