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The storm hanging over the U.S. economy has stalled. Key indicators aren’t turning up; heck, they’re not even turning sideways yet.
It’s clear the dark clouds raining down on the economy won’t be going anywhere anytime soon. Thus, we should soon start to expect some peripheral flood damage.
That means bad things for some currencies. But I also see a very good opportunity right now. More on that in a moment. First, I want to make something very clear …
The Dollar Has Been Severely Beaten,
And the Euro and Pound Are Next
The Philadelphia Fed economic index recently showed manufacturing in the Philly area contracted more than twice as much as expected.
But that was only the first beat in a drum roll of bad news this week. There was also negative data on inflation and jobless claims.
So are analysts jumping all over the R-word again? Actually, they’re skipping to the next letter of the alphabet in evaluating the U.S. economy. I’m talking about an S-word — stagflation. You know; that delightful combination of near stagnant growth amidst rising prices.
The buck has already received a severe beating on account of these pitiful fundamentals. And as I told you last week, the euro and the British pound are priced for perfection and thus in danger of getting hammered.
Here’s the good news: There ARE other currencies out there that aren’t weighed down by lousy fundamentals. And among these strong currencies …
The Australian Dollar Is
In a League of its Own
Australia is a prime example of a major industrialized economy that is NOT suffering from financial-led turmoil.
And that means the Australian dollar stands to benefit.
Here are just two reasons why …
Great Fundamental #1:
Demand for Commodities
Australia’s economy is driven by natural resources. And when gold is trading well over $900 an ounce and crude oil closing above $100 per barrel for the first time ever this week, you can see why a resources-rich country like Australia is flourishing.
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| Demand for natural resources should power the Australian dollar higher! |
Thanks to steady demand from China and other emerging Asian markets, Australia is rolling along like a snowball down a hill!
No doubt you’ve heard of China’s unrivaled demand for natural resources? Well, the Australian labor market proves it’s true.
In January, Australian unemployment fell to its lowest level since 1974. And the addition of 26,800 new jobs marked the 15th consecutive month of gains.
Why? The Australians can’t dig up gold or ship out wheat fast enough to meet demand!
And remember that Australia’s job market strength comes as the employment situation in the U.S. is softening. Opposite ends of the spectrum, indeed.
There’s no doubt Asian demand is a boon to Australia’s economy.
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Great Fundamental #2:
Relatively High Interest Rates
Currency trading, at times, is largely determined by the difference between countries’ interest rates. Generally speaking, a currency that throws off a yield of 6% is a far more attractive investment than a currency yielding only 0.5%.
These yield differentials make up the mechanics of the carry-trade — which I’ve explained in previous Money and Markets columns.
I’ve thrown together a simple table so you can see how Australia’s interest rate situation, as determined through central bank policy, stacks up to those of other major economies.
As you can see, the Australian dollar is second only to New Zealand (8.25%) in terms of yield. But what’s even more appealing is the direction rates are expected to take.
Most major central banks around the world are in one of two positions:
#1. They have already cut rates and are expected to cut rates further.
OR …
#2. They are expected to begin cutting rates.
The Reserve Bank of Australia happens to be in a different position: they’re pushing rates in the other direction — UP.
Why? Because they can!
As I pointed out a minute ago, the Reserve Bank of Australia is working on a firm growth foundation. They have no worries about tightening up monetary policy to control rising prices, which stem largely from the country’s super-tight job market.
Other central banks would have to sacrifice economic growth with interest rate increases. And that’s just something Australia won’t have to do.
While the Australian Dollar Is
Well Positioned, Stay Alert!
You know now why I’m bullish on the Australian dollar over the long term. However, it’s important that you also understand that even the strongest swimmer can have a tough time staying above water in a perfect storm.
Currencies that attract investment via high yields are vulnerable to downside in an environment flooded with risk, despite strong fundamentals. This is just the kind of environment we have right now.
So we could see money exit the Aussie dollar in search of less volatile and less risky investments at any point.
The key question is whether traders are willing to look past near-term problems in the global markets and follow the fundamentals.
Bottom line: I think the Australian dollar has a date with U.S. dollar parity in the long-term. But we cannot underestimate the trouble yet to unravel in the American, British, and European markets, either.
I’ll continue to keep you updated every week!
Best wishes,
Jack
P.S. We posted our Orlando Money Show presentations to the Web, and the response has been incredible. If you haven’t had a chance to view my take on the currency markets yet, just turn on your computer speakers and click here.
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