Tuesday, October 07, 2008

Financial arithmetic

Since May the all Ordinaries index of Australian stock prices has declined from 6000 to about 4400 which is a decline of about 25%.  The value of the Australian dollar has over the same period fallen from about 0.98 US cents to a low today of just under 70 cents.  This is a decline of a bit more than 25%.  To be more precise one US dollar's worth of Australian equity four months ago in May was worth about 52 cents today.

Update: (Wednesday): The Aussie dollar collapsed to a bit over 64 cents last night.  This is perplexing.


jc said...

Interesting calc isn't it? funnily enough I was playing around with that number last night and bought Aussie dollars.

jc said...


The fall of the Aussie is a liquidity issue. Australia is an external deficit country which means we are reliant on foreigners wanting to take an exchange rate risk as against being self reliant and not having to incur risk if we self financed, ie ran a C/A balance.

High US interest rates have shown just how much demand there is for Dollars as a result of the transmission system being shut down, which is a major competitor of ours for funding.

Financial markets often refer to risk appetite with risk appetite jaws being either open or closed. Australia does well when those jaws are open and people are prepared top take risk. Believe it or not we are still viewed around the world like a junk bond in terms of risk. Not credit risk per se but risk on potential return.

The big driver for risk is the Euro/ Yen cross. When that goes up the Aussie also has a potential to appreciate. it has absolutely collapsed in the past few weeks indicating a tightening in the risk appetite even more than before.

This collapse was the best indicator for the largest fall in the Aussie % wise over time in the past 30 years.

A big driver has been Japanese housewives reducing market risk on their investments believe it or not.

One other thing that pushed it was the offshore bidding for Origin.

rabee said...

Why did he the Australian dollar go up to .97USD?
That's more perplexing to me.

jc said...

98 cents actually.

Why did it go up there? Oceans of liquidity slashing around the globe. Veritable oceans of liquidity.

Aussie only does well when there is lots of money around the world looking for a home.

hc said...

Jc, you bought Aussie dollars right?