What a difference a couple of months can make…
Back in March the Aussie dollar was at 17-year lows. Signalling to the market that our economy was in for a world of hurt.
Today, things couldn’t be more different.
For the first time since the pandemic broke, the AUD has hit 70 US cents. A milestone that few would have expected to see this quickly.
So, what does it mean for markets, and more importantly you?
High hopes
Generally speaking, a higher dollar against the greenback points towards optimism.
It suggests that our local economy and markets are perceived to be in a stronger position. A fact that can clearly be seen in our handling of the coronavirus.
Australia truly has been one of the lucky countries throughout this global event. Managing to (so far) get through the worst of it without too much pain. At least, from a health perspective.
Economically speaking, it could be a while until we see the full extent of this pandemic. But, compared to the US, we still seem to be ahead of the game.
Indeed, even our own treasury is starting to see the glass half full.
Today they declared that the fallout might not be ‘as bad as we thought’. Which, if true, would be a miraculous result for our country.
All of this feeds into the idea that we’re recovering faster than most. One of the major drivers for the dollar’s surge of late.
When it comes to trade, that means imports will be getting cheaper. So now is a great time to think about any overseas purchases you might want to make.
Conversely, it will also put pressure on our exporters. With a higher dollar, they may see less demand for certain goods or services.
The crucial takeaway though is that a high dollar suggests economic strength.
A sign that our stock market and investors will gladly welcome.
But, are they getting too far ahead of themselves?
Not out of the woods yet
The fact of the matter is there is still a lot of uncertainty. Not just in terms of our economic recovery, but also in social and political issues.
For example, iron ore — one of our biggest exports — is booming right now. That’s thanks largely to the fact that one of our biggest competitors, Brazil, is being ravaged by COVID-19.
With little competition and strong demand still from China, this has been a huge boon for our miners.
Whether or not it is sustainable though is no guarantee.
Even if we ignore Brazil’s plight for now, it’s no secret that things are currently testy with China. If we see iron ore dragged into the fray it could be disastrous. Dashing our hopes for a quick-fire recovery.
Whether or not such a scenario will happen is unclear. It is a big risk though.
Furthermore, in somewhat of an ironic twist, a rising dollar could impede our recovery.
As I mentioned earlier, the higher value will weigh on exports. That means we could see less money flowing in at a time when we need it most. An outcome that could drag on both corporate profits and job numbers.
Suffice to say, we’re not out of the woods just yet. Even if the mood is turning more bullish.
In fact, because it is turning more bullish you should be extra careful. As my colleague Shae Russell notes: this ‘recovery’ could be totally artificial.
Central bankers are the primary people responsible for our current circumstances. Flooding their markets with billions, or even trillions of dollars of liquidity. The first step down a very dangerous economic road. One that could lead to a far greater crash to come.
Don’t take my work for it though. Check out Shae’s Pandemic Market Crash Roadmap for yourself. A detailed look at what has happened, and what may be yet to come.
Get your free copy, right here.
Regards,
Ryan Clarkson-Ledward,
For The Daily Reckoning Australia
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