The Aussie dollar once again moved up against the greenback, nearing 87 cents. The strength of a currency is often a referendum on the strength of an economy. Australia’s economy has some notable weaknesses, namely the trade deficit and the high level of household debt as a percentage of GDP (see yesterday’s letter). But it also has some obvious strengths which make it appealing to investors.
The Australian Bureau of Agricultural and Resource Economics—which has the clumsiest name of any government agency we’ve ever encountered—announced earlier this week that Australian commodity exports should generate nearly US$144 billion in sales in 2007 and 2008. The stronger Aussie dollar actually lowers the sales figures a bit. Commodity sales priced in US dollars are then converted back into the Aussie. With a falling greenback, Aussie export earnings take a hit.
So far, however, high commodity prices—especially for nickel and copper—have kept export sales growing. With BHP (ASX:BHP) and Rio Tinto (ASX:RIO) negotiating a hefty increase in the iron price for next year, and with a rebound in prices for thermal and coking coal likely, the Australia-China parternship looks as strong as ever. Not just boom. Sonic boom!
The Daily Reckoning Australia