Economy

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The Volatility of the Australian Dollar - BORIS SCHLOSSBERG, DIRECTOR OF GLOBAL RESEARCH & ANALYSIS, GFT

Mortgage One - Monday, October 03, 2011

The Aussie dollar was rising against the US dollar, riding high on commodities, but with global equity markets in retreat we are seeing the dollar fall back below parity. The Aussie dollar has always had a strong correlation to the rise and fall of global markets.

The market is also getting nervous with the China story. The fear is that the Chinese economy is heading for a hard landing and with Australia’s growth so heavily tied into to China the Aussie dollar is suffering.

Where once China was viewed as the locomotive of the world economy, we are starting to see some slow down, and the debt crisis in Europe and the US may also be hitting China, whom may be holding some very low quality European and US bonds.

The biggest problem with very large sovereign debts is the ability to repay the debt. Japan for instance held large debts for many years and keep spending to face off a recession so they were never able to repaid the debt, the result was the economy just plodded along at very low growth, and growth is what is required to repay the debt.

In the meantime, it’s no surprise that Greece is saying it can’t meet its financial deficit targets this year or next year. While in the background, Germany’s Angela Merkel’s secret plan, Project Eureka, is seeking to lump all the Greek assets together and privatising them. The plan will benefit Greece by reducing their debts by half, and then at the same time also investing about 50 billion Euros into Greece in order to stimulate growth.

Overall, Project Eureka seems to make a lot of sense economically however there may not be the political will to implement Angela’s plan, which requires the agreement of all the European member nations which are harbouring resentment now against Greece.





 



 


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