Australia’s Private Sector Credit made no gains in February despite forecasts calling for a rise of 0.5% in the figure. Credit available to both consumers and companies has on only one occasion seen worse gains in the last 16 years.
Direct investment from abroad fell substantially in the latter part of 2008 and in the beginning of 2009 as the threat of a weakening Australian Dollar posed the possibility of diminishing returns on such investments. Global risk aversion also led investors to rally towards much safer assets such as U.S. treasuries.
This may all change in the coming months. Last week we saw an Australian government bond auction where a substantially larger-than-usual crowd bid for the nation’s debt. In fact, there were 2.7 times as many bids as there were available securities. Such activity may be a sign that global investors are seeking higher-yield, despite concerns of underlying weakness in the private sector economy.
Australia’s currency may actually see substantial strength over the next six months. With the help of the Federal Reserve’s quantitative easing program, commodities have been rallying as fears of accelerating inflation have been met with investment shifts toward tangible goods. We’ve seen a 180-day rolling correlation between the value of the Australian Dollar on a trade-weighted basis and the S&P Goldman Sachs Commodity Index of between .94 and .974 over the last six months. With inflation fears rising, commodities are likely to float upwards, and thus usher the Australian currency advance.
With that, there is less of a chance that exchange rate risk will be a significant factor as investors weigh the consequences of lending to Australia.
