By: Dr. Mike Campbell
Australia was the only major economy to avoid going into a technical recession during the global financial crisis. It was also the first major economy to restore interest rates to a more normal level as the worst of the storm passed. Australia has significant raw material deposits and is an important exporting nation for many commodities that the rest of the world needs.
The stability of the Australian Dollar and the opportunity to gain reasonable returns on money on deposit has led to the currency becoming regarded as a safe haven. This, in turn, has driven the value of the currency higher. The currency rose to $1.0318, the highest value since the currency was allowed to float freely 29 years ago. Increased demand for Australian commodities in China and India has helped to buoy the currency.
Rising Above Nature
Natural disasters in neighbouring New Zealand and in Japan, together with the most devastating flooding in Australian history had helped to dampen market sentiment, but there seems to be a new optimism that Australia will be able to handle these problems in her stride. Another strand of logic suggests that the Australian reconstruction of flood-hit regions will lead to a further strengthening of the Aussie Dollar as reinsurers who underwrote the Australian insurance industry need to buy the currency in order to meet payments to claimants – similar logic was applied to the situation in Japan where the Yen soared (briefly) after the disaster there.
Australian interest is under control, but it is clear that the Australian Reserve Bank is keeping an eye on it and will use rate increases as a tool to hold it in check. All in all, the outlook for Australia is looking strong right now – of course, a high Australian Dollar may harm the nation’s exports.