Australian Shares and the Kangaroo Carry Trade

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It takes money to buy money, we always say. And this demand for Australian shares (Coles, Rinker, Qantas) is creating demand for the Aussie dollar. As we now know from our consumption of local meat pies, local coffee, and local shower curtains, our American money is no good here, and getting worse by the day. If we want to spend what we’re paid, we have to covert our greenbacks into the local plastic/rubbery stuff. This is a mini-version of the demand being created for Australia’s currency.

There is even what you might call a Kangaroo carry trade going on, where investors borrow cheap in Japan and buy Australian stocks and cash. With interest rates in Australia already high and perhaps headed higher next month, currency speculators are flocking to this land girt by sea. All that new cash has to go somewhere, and the share market has not been shy in claiming its share.

With resource stocks already strong on rising copper and base metal prices, and with oil and energy shares churning higher and even good old gold selling for $681 on the forward contract, there is a lot of momentum in the market. Will all this feel-good liquidity be enough to power the market past last year’s may highs on to higher highs? Or will the Aussie dollar correct, interest rates remain fixed, and the melt up stop melting?

The next month will tell. In the meantime, the main trends in the market are not event or news driven but demand driven. That is, energy and resource companies don’t need huge inflows of carry-trade money to be good businesses.
China and Europe are ensuring that.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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