The little $A battler:a new theory

Something odd has been happening with the Aussie dollar lately.

The little Aussie battler has been rising – and falling – with the New York stock market.

That’s not supposed to happen.

Movements  in the Dow Jones index, though erratic lately, are usually assumed to reflect perceptions of prospects for the US economy.

So if the US economy appears likely to get stronger, without any matching movement in Australia’s prospects, the $A should weaken, relatively speaking.  That’s because because money and resources usually flow to the place where prospects are brightest.

That, though, is essentially, a static analysis.

And an article, just published in  the latest Reserve Bank Bulletin, provides a tbeoretical basis, to explain what is actually happening.

It’s well worth reading, if you are involved, even indirectly, in currency trades.

The full  article can be found at www.rba.gov.au.

The authors argue that things change in times of “market volatility and uncertainty.”

“In periods of elevated market volatility and uncertainty….the net effect of positive news on the US economy tends to be an appreciation of the $A/$US exchange rate,” they say.

“Empirical evidence suggests that these effecrs are most evident for US data releases pertaining to growth, employment and production,” they add.

“The more pronounced effect in recent years is likely to reflect the abnormally high level of market volatility during the global economic crisis.” they say.

The Reserve Bank economists add that this has led “market participants” to be “extremely sensitive to new economic information.”

That might be something of an understatement, in today’s conditions.