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The Australian dollar is moving away from its “risk” status. This comes as the world is looking for good investments and doesn’t see the euro and the A$ in the same light anymore.

Will this rally find a limit? The Aussie is enjoying some positive factors but not all is rosy down under:

  • Sound metrics: With so much debt in Western countries, Australia’s perfect AAA and low debt to GDP ratio of around 30% attract global flows looking for higher yields and safety.
  • German flows: The Bundesbank announced that it is diversifying its currency holdings into the Australian dollar.
  • Swiss flows: The SNB’s peg to the euro raises its euro holdings. The Swiss central bank recently reported that while dollar, yen and pound holdings remained stable, it raised holdings of the Aussie.
  • Chinese Flows: Australia’s largest trade partner is apparently buying the debt of Australian states. The Chinese choice of state debt is quite surprising given the recent ratings pressure some Australian states are under.
  • Improving Economy: Earlier in the year, it seemed that the mining sector is the only strong sector in Australia. With recent improvements in retail and construction, the picture looks a bit better.

On the downside, we have these factors:

  • Housing bubble: There are more signs that Australia’s housing sector is imploding. The real estate markets look like the US before the fall.
  • Low Inflation: Recent inflation data shows a deceleration in price rises. This opens the door for more rate moves.
  • Strong currency can play against it: Similar to New Zealand, the high value of the currency can encourage action from the RBA – not by intervention, but by a rate cut from the relatively active central bank.
  • Chinese slowdown: China is landing. Australia isn’t feeling it just yet, but negative headlines are a risk to the Aussie.

This article is part of the Forex Monthly Outlook. You can download it by joining the newsletter in the form below, which appears on any article on  Forex Crunch.

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