New U.S. Treasury statistics released this week indicate that the Australian Dollar (AUD) continues to weaken against the U.S. Dollar, although an increasingly optimistic outlook for economic growth in China.
The report indicates that U.S. economic growth is expected to pick up after an annualised decline of 0.5% in the third quarter of the year.
Stronger export markets and a weaker Australian Dollar suggest that Australia’s growth rate, in conjunction with strengthening U.S. growth prospects, is one of the factors contributing to the recent upward revision of U.S. economic growth in Q3. The U.S. data also indicates that the U.S. housing market remains well supported. Some analysts are predicting that housing prices will be stronger than most economists expect.
In terms of trade, a strong export growth in China can only help reduce import prices to U.S. consumers, lowering the real cost of goods and services. Even more encouraging is the outlook for employment in China, following years of overcapacity and state-sponsored investment in certain sectors.
In response to the weak Australian Dollar, some companies have added manufacturing jobs in Australia, in response to strong domestic demand. China is one of the few places in the world that has less overcapacity, as domestic demand has been ramped up to support a robust local economy.
This is only expected to benefit exporters, as new business starts are expected to pick up. Although China’s exports have generally been higher than imports, there is a growth in “export-importing countries” including Vietnam, Cambodia, Pakistan, Mongolia, Malaysia, Indonesia, the Philippines, Thailand and Vietnam. There is also a very promising growth in India, particularly in information technology, retailing and infrastructure-related products.
Now, the Australian Dollar is strengthening and some traders are beginning to make serious money by buying the AUD. They are selling when the USD strengthens and buying the AUD when the USD is weakening.
Still, there is still work to be done, especially given the uncertainty of the outlook for exports and business investment in China. And, any growth in business investment, for example in the recent spike in demand for copper in China, may not be sustainable. As a result, short-term earnings will probably have to remain depressed or even decline, as the impact of falling commodity prices causes businesses to be more cautious about their spending decisions.
Another consequence of the weakening Yuan is that it is more difficult for Chinese consumers to obtain imports, including goods and services. This means a weaker AUD is likely to continue to hurt Australian exporters as consumers in China to try to save money, and do not purchase imported goods.
The increasing economic power of the Yuan is one of the major reasons the Dollar Index remains low despite strong U.S. dollar appreciation. The recent devaluation is also a good reason to help offset any weakening of the AUD and potentially help boost profit margins.
For some traders, the strengthening of the Yuan has had a detrimental effect on profits, as it reduces the dollar value of exports, as the Yuan is now “grossed up” by the exchange rate in China. Consequently, it is much harder to get a “true” trade-weighted index (the index for Australian-China trade) by using AUD-USD and AUD-JPY (as well as AUD/CHF) instead of different indices that include the GBP, EUR, JPY and other foreign currencies.
If currency values continue to fall as they are doing right now, the currency exchange rate will have to strengthen and an alternative index such as one that includes each currency would not be warranted. since the exchange rate would move to an “uncomfortable” level for each currency. in the long run.