There’s no surer way to receive a whiplash injury than watching the speed of the Australian dollar escalate or the gold price jolt to new heights.
It’s like watching the Australian Open tennis, with both sides of the net hitting hard.
For those who are less concerned about global market forces, the Australian dollar is at a three-year-high, having broken through US70¢, so you might want to seize the moment to book that holiday to the US or jump online for some US bargain shoe-shopping.
(That’s of course if you are alright with your social media being trawled through and your fingerprints and DNA being stored in a US customs vault.)
Economists don’t consider the Australian dollar at these levels to be aberrant or even a flash in the pan. In fact, the range for fair value starts at US70¢, and runs to US73¢, which is where AMP veteran economist Shane Oliver pegs it.
As breathtaking as the rise in the Australian dollar has been, it isn’t a patch on the skyrocketing gold price which has moved so high that the vertical axis on its price graph needs lengthening.
Unfortunately, Australians can’t take credit for most of what is pushing our currency or gold higher.
We have Donald Trump and his erratic, extreme and sometimes mind-bending US policy decisions to thank for probably three-quarters of it.
Europe is also experiencing a surge against the greenback for the same reasons.
Thanks to the behaviour of Trump the US dollar is feeling a bit toxic and dangerous and international money flows are looking for safer havens.
But we can take a bit of the credit. In the first instance our interest rates are generally a little higher compared with many other Western countries. Higher interest rates support the valuation of currencies.
And there is an expectation that the next rate movement in Australia will be up while the US, for example, is still sitting at the softening point in the interest rate cycle. The December quarterly inflation rate – which came in a bit higher than expected with a headline reading of 3.8 per cent, certainly increases the likelihood that the RBA will move rates up sooner rather than later.
That outlook may be altered a little next month when the Reserve Bank of Australia re-visits interest rates. But whether it remains on hold with the current rate or increases it by 25 basis points is still a coin toss.
The general lift in commodity prices – which we produce in a disproportionately large quantity – also helps to fortify the Australian dollar.
And in this regard our Australian gold producers are punching above their weight.
As breathtaking as the rise in the Australian dollar has been, it isn’t a patch on the skyrocketing gold price which has moved so high that the vertical axis on its price graph needs lengthening.
It is difficult to pinpoint what tipped the Australian dollar into the stratosphere in such a short period of time – or rather what has sent the US dollar off a cliff.
It has been clearly building since Trump came into office last year. From last January until now the US dollar has fallen by 11 per cent – which has facilitated our dollar moving up 13 per cent and the Euro to rise 15 per cent.
Since imposing his Liberation Day tariffs, Trump has been a constant source of uncertainty and fear for the world economy.
Understanding whether he will back away from extreme policies he has announced has forced economists, traders and asset allocators to become amateur psychologists and simultaneously tested the bounds of risk.
Those who thought we could take a breather from the turmoil this year are being disappointed. The white knuckles and nail-biting continues.
It started with airstrikes in Nigeria, then moved to the arrest of the Venezuelan president and his wife on criminal charges of drug trafficking and narco-terrorism. This was followed by plans to take over Greenland and threats to impose hefty tariffs (later walked back) on European countries that argued.
And this was punctuated by a ratcheting up of the fight between Trump and the head of the Federal Reserve Jerome Powell that threatens the central bank’s independence to set interest rates.
The Department of Justice had launched a criminal investigation into the $US2.5 billion renovation of the central bank’s headquarters. Powell said the probe was a political attack in response to the Fed’s refusal to bow to pressure from Trump to lower interest rates further and faster.
And then there are the structural concerns around the burgeoning level of US debt and fiscal profligacy. Both are feeding into the worry index.
The rest of the world hasn’t had a chance to catch its breath. And we haven’t even reached the end of January.
So why is the US stock market at almost record highs? For that, we can thank the AI boom (or bubble as some believe). It has been doing all the heavy lifting on the equities market.
Right now, it’s the last line of defence.
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