Adios USD: Australian, Canadian $ Reach Parity

♠ Posted by Emmanuel in at 10/15/2010 07:52:00 PM
In case you missed it--and I have been posting a lot on currencies these days--the Aussie and Loonie have recently hit parity or better with the US dollar though both have slipped back the last few hours. Don't expect this temporary respite for USD weakness to last long, however. Both the Australian and Canadian dollars are known in the foreign exchange markets as "commodity currencies" since their performance is tied to the commodities both countries exports in large amounts. With the US set to helicopter drop wads and wads of greenbacks, commodities become natural bulwarks against inflation since it's easy to print paper currency but much less to produce natural resources. They don't call many of them "non-renewable resources" for good reason.

Returning to currency basics, remember that both currencies are expressed differently. The Australian dollar is expressed in terms of how many US dollars one Australian dollar will buy (AUD/USD). Meanwhile, the Canadian dollar is expressed in the opposite way as to how many Canadian dollars one US dollar will buy (USD/CAD). The currency in the numerator is always fixed at 1, so it's always the value of the currency in the denominator that increases or decreases when exchange rates are quoted.

In any event, both have seen recent spells of one Australian or one Canadian dollar being worth more than one US dollar. Let's begin with the Australian dollar reaching parity for the first time since Oz let its currency float way back in 1983:
Australia’s currency reached parity with the U.S. dollar for the first time since exchange controls ended in 1983 as the biggest mining boom in a century and U.S. stimulus prospects spurred demand for the nation’s assets. The so-called Aussie gained the most among the greenback’s 16 most-traded counterparts over the past three months as China’s demand for Australian coal and iron ore helped drive economic growth to the fastest pace in three years. Parity was reached after Federal Reserve Chairman Ben S. Bernanke said today that additional monetary stimulus may be warranted.

“The Australian dollar is undergoing a significant structural appreciation as the China-driven commodity price boom boosts Australia’s economic growth rate and delivers record trade surpluses,” said John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney.
See the chart above to picture the relentless rise of the Australian dollar [click for a larger image]. As late as October 2008, it could only fetch about $0.60, if you can believe. Such is the magnitude of the helicopter dropping to come. Meanwhile, the Canadian dollar reached parity once more a few days ago after achieving this feat in 2008 and a couple of times since then:

Canada’s dollar weakened from parity with its U.S. counterpart as stocks and commodities including crude oil dropped after a measure of consumer confidence trailed forecasts. The currency was among the three worst performers among the 16 most-traded counterparts of the greenback, which touched a 15-year low versus the yen and an eight-month low against the euro after Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted.

The decline in Canada’s currency is due to “the sharp selling in U.S. equities,” Sacha Tihanyi, a currency strategist at Bank of Nova Scotia’s Scotia Capital unit, wrote via e-mail. “There are some upside risks in the U.S. dollar versus the Canadian dollar over the next few sessions, particularly with the Bank of Canada coming up...”

The loonie, as the currency is often called, was worth more than the greenback yesterday for the first time since April. The U.S. dollar has fallen this month against its 16 most-traded counterparts on concern that further Fed easing will debase the currency. Bank of Canada policy makers meet next week to decide on interest rates.
So, I ask you again: who is the real "currency manipulator" here? The rest of us--lump in Australia and Canada in there, too--or the Americans keen on effecting a USD free fall? The world has gone mad, and the identity of the maddest bomber of all is known to all.