With post-TAG money potentially fleeing the U.S. dollar, I suspect many investors will look to the Aussie dollar as an alternative. The case for the Australian dollar seems strong, on the surface.
While the U.S. dollar yields just 0.25%, the Australian dollar pays 13-times that with an interest rate of 3.25%. This alone makes the Aussie dollar seem like a good bet.
But… if you look beneath the surface, buying into the Aussie now seems to be a fool’s game. For one, AUD/USD has run up significantly over the past 12 years. It’s more than doubled in value in this time. Take a look at this chart of the AUD/USD going back to 2001.
This means new buyers are getting in at the top, paying highly inflated prices. That spells trouble for new investors piling in late.
You see, the Aussie dollar has been run up for a reason. China’s massive demand for Australia’s commodities has consistently pushed up the value of the AUD/USD as the country’s growing exports led to a massive inflow of Aussie dollars.
But now the AUD/USD is in a topping pattern, showing its vulnerability to further slowing in China’s appetite for commodities. If China’s growth picks up again, the Aussie dollar will be fine. But that’s a big “if.”
Currency investors are prudent to stay on the sidelines, clear of the precarious Aussie dollar, until a clearer growth (or contraction) trend develops in China. Then, and only then, will the Aussie dollar be a viable option as an alternative to the U.S. dollar in a post-TAG era.
If you haven’t done so already read the Survive & Prosperissue on “Where to Put Your Money If You’re Worried…”
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