Aussie Dollar May Not Be A World Beater If High Beta Currencies Fall Foul Of Investor Sentiment
Iron ore futures in China fell to their lowest level in more than two months on Thursday, and with iron ore a key component of Australia's economy, traders subsequently sold the Australian dollar down to an eight-day low of 0.7625 versus the greenback (AUDUSD). But there's arguably another component to the Australian dollar that's also deserving of consideration. Given Australia's large global presence as a global exporter of commodities, its currency is often characterised as high beta, that is to say highly-geared to the global economy, rising when investor confidence in the world economy is high and falling when it is low. In that sense, the Aussie has been a beneficiary of the Trump reflation trade, a trade that saw investors moving into risk assets on expectations that the economic and fiscal policies of the new US President would kickstart the US economy and by extension prove a boost for the global one. If however, the Trump agenda gets bogged down in Congress, in the same way that attempts to repeal Obamacare have become protracted, then investors might well become less enchanted with the Trump reflation trade and high beta currencies such as the Aussie could get sold off in the process.
Written by Neal Kimberley, External Currency Analyst.
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