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Why the Aussie is up and the Greenback is down

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Why the Aussie is up and the Greenback is down

Has the recent weakness in the US dollar surprised you? Has the strength in the Aussie dollar had you scratching your head at all? To many, including your author, these moves have been counter-intuitive to some degree. So what could possibly be placing downward pressure on the Greenback and upward pressure on the Aussie?

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Andrew Macken is the Chief Investment Officer of the Montaka funds and the Montgomery Global funds. He established MGIM in 2015 in partnership with Montgomery.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Hi Andrew, I don’t understand this and am missing something. My understanding was that any current account deficit must by definition be balanced by a capital account surplus (i.e. borrowings from foreigners or selling of assets to foreigners). Given these capital flows, why would a current account deficit necessarily mean downward pressure on a country’s currency?
    Thanks.
    Kelvin

    • What if the US is buying their own debt ie printing money to fund the deficits rather than relying on foreign borrowings. That would weaken the dollar. This stuff has got my head in a spin also so this is just a suggestion.
      There was an excellent article in the AFR if you’re interested that has an alternate view of the surprise US dollar weakness: http://www.afr.com/business/banking-and-finance/hedge-funds/andrew-hunt-follows-the-money-to-decode-global-financial-system-20180201-h0sbk3

      Here is the relevant excerpt:

      “Globally, Hunt has some firm views about the surprise fall in the US dollar in 2017 and the melt-up in stock markets that accelerated in the latter part of the year.
      Hunt is of the controversial view that a large wrinkle in the US financial system arose because President Donald Trump inherited a $US500 billion ($644 billion) stockpile of cash at the US Treasury.
      Typically the government spends what it raises in the bond market, funding the deficit with debt issuance.
      But this time there was no offsetting bonds to mop up the money that found its way from the commercial banks to the deposit accounts of the large investment banks that, at one stage, amassed close to $US800 billion in excess deposits.
      As that idle cash weighed on their shareholder returns, Hunt says these banks, or even one bank, deployed one third of the capital in the form of leverage to institutional clients, while two thirds went offshore providing banks in Europe, Australia and Japan with plentiful funding.
      The resulting outflows weakened the dollar while the leverage they provided put a rocket under stock prices around the world.”

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