As Australia’s largest trading partner, China and its economic growth can have a significant impact on the Australian economy. Recently, Chinese economic growth moderated to 7.7%, disappointing many investors. While some believe this announcement supports the case for a broader slowdown, we are not so pessimistic. A development we believe to be beneficial for both countries has to do with how they trade with one another. On April 11, 2013, direct trade between the Australian dollar and the Chinese yuan occurred for the first time in history. Previously, trade between the two countries required an intermediate trade in U.S. dollars. By eliminating this step, trade should become more efficient due to lower transaction costs and slippage.
More efficient trade is a clear positive for both economies, but what effects could this have on investor portfolios? For the past six months, many analysts have voiced concern about the strength of the Australian dollar against the U.S. dollar. However, the United States is only Australia’s third-largest trading partner.5 Interestingly, the Australian dollar is trading 11% below its two-year high against the Chinese yuan. While the value of the Australian dollar may not be as attractive as it was this time last year (5% higher than the two-year low), we do not believe we are approaching a period of prolonged currency weakness. With many economists in Australia concerned about the effects of currency strength on exports, it is interesting that the currency’s strength is near its two-year average when compared to the currency of Australia’s largest export market, China. Putting these figures in perspective, it is worth noting that even in the face of currency strength, Australia’s economy expanded at the fastest pace of any developed market in 2012.6
Regional Economic Leadership and the Potential for Interest Rate Cuts
Despite recent concerns about a continuation of recession in the eurozone, economies in Asia are projected to grow at the fastest rates in the world. For 2013, economists at the IMF currently expect the Australian economy to expand by approximately 3%, a by-product of strong intra-Asian trade. However, should exports unexpectedly cool, Australian policymakers have a higher degree of flexibility compared to central banks in Europe and the U.S. With short-term rates currently at 3.0%, the Reserve Bank of Australia could cut rates to lower borrowing costs. Recently, Prime Minister Julia Gillard signaled this option, should global economic growth slow.
Ultimately, we believe that investors will continue to search for higher-yielding opportunities around the world. Given the current environment, we believe allocations to Australian debt could provide investors with attractive levels of income combined with diversification away from the U.S. dollar.
Rick Harper is head of fixed income and currency for WisdomTree Asset Management. This post was republished with permission from the WisdomTree blog.
1Standard & Poor’s, March 31, 2013
2Source: Bloomberg, March 31, 2013.
3Source: Wall Street Journal, March 6, 2013.
4Proxied by the Citigroup Australia Broad Investment Grade (AusBIG) Index, March 31, 2013.
5Source: Australian Government Department of Foreign Affairs and Trade, October 2012.
6Source: IMF, April 16, 2013.