One of the biggest currency surprises we have seen this year is the Australian dollar. Normally solid, it hit an air pocket over the last month and lost just under 5% of its value, after a steady hover in the months before. To picture its year-to-date performance, imagine a graph that looks like a mountain; with an increase in the first quarter, followed by flattening in the next two quarters, with a sharp drop-off this last month.

That trajectory is a good proxy for what has happened this year in terms of global growth. The Australian dollar responds to global growth and its impact on Australia’s commodities. Australia is a big supplier of raw materials to manufacturers in China, and if that base is idle, the Aussie economy and its dollar takes a hit.

That was the case this year, as economic prospects looked brighter at the beginning of 2014, but faded as the year wore on. Better manufacturing numbers recently have failed to lift the Aussie dollar (and the economic mood).

But it is not all about the global economy. Australia also is sitting on what some analysts consider a powder keg – its real estate market. It is the 12th biggest economy in the world, and its housing market has a real problem with affordability. Home prices are nine times higher than the average income in Sydney. By comparison, that same number is 7.3 in London, 6.2 in New York, and 4.4 in Tokyo. These kinds of stratospheric valuations are not sustainable. They will either float down or slide more dramatically, a reaction we are seeing more frequently across the globe.

For the Reserve Bank of Australia – the monetary authority – the weakness is good news, as a way to help the struggling export sector. If anything, the bank is trying to talk the currency down further.

My View: So where do we go from here for the Australian dollar? We honestly believe it will stay weak for the foreseeable future – namely the months remaining in 2014. Global growth will chug along at a moderate pace, but we do not expect that to change the markets. It will be 2015 before we see a real return to Australian dollar strength.

This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make an independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.

 

This report is for general information and education only and was compiled from data and sources believed to be reliable. City National Bank does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors as of the date of the report with no obligation to update or notify of inaccuracy or change. This report is not a recommendation or an offer or solicitation to buy or sell any financial instrument discussed. It is not specific investment advice. Financial instruments discussed may not be suitable for the reader. Readers must make an independent investment decisions based on their own investment objectives and financial situations. Prices and financial instruments discussed are subject to change without notice. Instruments denominated in a foreign currency are subject to exchange rate and other risks. The Bank (and its clients or associated persons) may engage in transactions inconsistent with this report and may buy from or sell to clients or others the financial instruments discussed on a principal basis. Past performance is not an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.