Friday, April 20, 2007

Lucky Aussies-Except With Regards to Weather

Of the major currencies this year, the Euro and the British Pound have been the big winners, while the U.S. dollar, Chinese yuan and Japanese yen have declined. However, two currencies have been even stronger than the European currencies: the dollars of Australia and New Zealand. The main reason for this strength is of course the so-called carry trade and the fact that Australia and New Zealand have high interest rates.

Another, although much less important, factor is the steady improvement in Australia's terms of trade. And the latest figures indicate that this trend continues. Import prices fell 1.7% compared to the previous quarter and 3% compared to the year before. Export prices were unchanged compared to the previous quarter and is up 5.8% compared to the year before. The reason for this improvement in terms of trade is of course the rising price of exported raw materials caused by increased demand from China.

It is because of this that Australia has been able to have the longest expansion in history and shows no sign of a immediate downturn, despite the existence of similar imbalances as in America. However, if the Chinese economy turns down, either because of an American recession or internal problems, than the Australian boom will be cut short. For now though, the Aussie economy continues its lucky ways.

However, I see now that with regard to the weather, Australia is not lucky. An extreme water shortage due to an ongoing drought means that agricultural production will fall which in turn will push up food prices.


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