I got an email this week about a previous blog post on the Aussie dollar.
She was curious why I was so bullish on the Aussie dollar when the precarious ecology is overexploited, in urban settings as much as in rural ones.

Australia’s ecology is possibly the most fragile of any continent and with the years-long drought and increasing use of land and water, serious ramifications for the future must be addressed. It may be that the land itself fails, even if Australian society succeeds.

My response is that you really have to look at what influences their economy and the Australian dollar. While Australia does export things like wheat that are subject to weather, this doesn’t move the Aussie dollar.

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You can pull up a chart of wheat and a chart of the Aussie dollar and there’s no correlation. Why? Well for starters, they are much larger exporters of things like gold, iron-ore, coal and liquefied natural gas. This comprises 37.6 percent of their exports while agriculture comprises 4.9 percent.

Therefore, Australia’s dollar is largely influenced by the things they mine, like gold. If you pull up a chart of gold and a chart of the Aussie dollar, you’ll see a very nice correlation to each other.

So it all boils down to what really moves a currency.

It’s the reason why I’ve never invested or not invested in a currency based upon its deficits. Yes, deficits matter. Yes, I prefer surpluses over deficits. But when you look at a chart of a country’s deficits and the movement of its currency, there are no strong correlations there at all. Therefore, I don’t watch it to see what a currency will do.

So what moves the Aussie dollar?

1.         The price of things they mine, such as gold

2.         The direction of the U.S. stock market

3.         The direction and level of the interest rate in Australia

There are other things that matter, but these are some of the top movers of the Aussie dollar.

You can pull up a chart of gold or U.S. stocks and see a tight correlation between these and the Aussie dollar. When people are willing to head into riskier assets like stocks or commodities, they’re also willing to go into a higher-yielding, offensive currency like the Aussie dollar.

Also, all things being equal, investors would rather invest in a high-yielding asset than a low-yielding one. Therefore when financial markets are stable or rising, money loves to pour into the Aussie dollar because it yields around 4.25 percent whereas the ailing U.S. buck yields under 0.25 percent.

So while wheat, soil, weather, etc. are all topics that matter in life…they don’t matter when it comes to what the Aussie dollar will do.

If gold is rising and stocks are stable to rising and the interest rate on the Aussie dollar is high relative to that of other major industrialized nations…then the Aussie dollar will head higher overall.

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If gold is diving and stocks are diving and the Aussie interest rate is being reduced, then there is a huge chance that the Aussie dollar would dive as a result.

Therefore, with each currency, find out what “really” moves it and what doesn’t. There’s tons of data out there on each country, but only a few things usually end up mattering as far as the currency’s direction is concerned.

It was a great question and I’m glad she wrote in about it. It gave me an opportunity to expound upon what really moves a currency…and in this case, the Aussie dollar in particular.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.