Australian Dollar on Sturdier Ground

Don't bet that a slowdown in the global economy will drag the Australian dollar down like it did in 2008.

Back then, Australia's currency fell off a cliff as the resources boom that fueled it sputtered.

But Australia's commodity sector is more firmly dug-in these days. In liquefied-natural-gas alone, more than $140 billion worth of projects are already under construction, compared with $15 billion in 2008. Significant committed investment in infrastructure to support massive coal and iron ore operations can't be quickly reversed either.



Record inbound merger-and-acquisition deals last year—worth $65.7 billion—also support the Australian currency as acquirers buy Aussie dollars to fund their investments. This year might not hit another record, but strong interest in resources should support continued dealmaking.

There are risks, especially slowing growth in China and India. But a hard-landing for Asia seems less likely than it did a few months ago. A more muted downturn won't pull the ground from underneath Australia's currency.

Further interest rate cuts from Australia's central bank are possible—dark clouds persist over retail and manufacturing. That could see yield-starved investors look elsewhere. Still, the Reserve Bank of Australia cut the cash rate twice late last year, with more or less no lasting impact on the exchange rate.

A seize-up in global credit markets would also weigh on the Aussie. When the markets shut in 2008, Australian banks were forced to sell local currency and buy greenbacks to meet short-term funding needs in U.S. dollars, Royal Bank of Canada strategist Michael Turner says. But the Australian banks, which have some of the highest credit ratings in the world, are less reliant on short-term funding than they were four years ago.

The Australian dollar has traded in a fairly tight range around parity with its U.S. counterpart for most of the past 12 months, compared with an average of around 75 cents for the past three decades. A deep shock to the global economy that decimates commodity prices could see a return to historical norms. A strong recovery in the U.S. that leads to higher interest rates there could be a game-changer too.

Absent such dramatic events though, the dollar's more likely to stay closer to parity this year than it is to fall back into its old ways.

Source: http://online.wsj.com/article/SB10001424052970204555904577164080084233546.html?mod=WSJ_Heard_LEFTTopNews