Markets: The Aussie dollar's Chinese chains

Chinese demand for commodities is helping push the dollar back up and analysts are divided on whether it's trading at fair value.

After a 16 per cent fall between April 11 and August 2, the Australian dollar is, incredible as it may seem, on the rise. True, it is a modest one at best – up 2.5 per cent since August 2 – but nevertheless a gain.

At 0814 AEST the Australian currency was at 91.31 US cents, up from 89.05 US cents on August 2, according to Bloomberg data. So is it trading now at “fair value”, as ANZ Bank’s foreign exchange strategist Andrew Salter thinks?

Fund manager Geoff Wilson, founder of his eponymous firm, doesn’t think so. He believes the Australian dollar should be trading lower – probably below 85 US cents. Only at such a level can what’s left of Australian industry compete successfully in foreign markets, he says.

Glenn Stevens would certainly like a lower dollar: “Depreciation of the exchange rate will be helpful in rebalancing growth given the transition that the Australian economy is facing,” the Reserve Bank said in its August statement on monetary policy.

Financial markets more often than not refuse to comply with the hopes of even the most powerful of actors, including central banks. The Australian dollar may be no exception. Financial markets tend to take into account many forecasts, and the foreign exchange market may have already priced in an expected rate cut by the Reserve Bank later this year with regard to the Australian currency.

Further helping the Australian dollar is something of sea-change in sentiment toward the Chinese economy. Australia’s biggest trading partner is perhaps not in the dire straits some initially thought. Industrial output in the world’s second-biggest economy rose more than economists estimated in July, with both China's export and imports up.

Commodity prices are rising because of this news from China. Yesterday, the spot price for iron ore imported through the north east city of Tianjin jumped $US5.60, or 4.2 per cent, to $US138.70 a dry metric tonne – way above what many had predicted the price would be at this time of the year (under $US100).

Other commodities are rising too. Gold futures are on their longest rally in four weeks, with notable Chinese demand for bullion. Copper futures are trading close to a nine-week high, with demand from China helping the price of the metal rise 4.2 per cent last week.

Yngve Slyngstad, chief executive of Norway’s $US760 billion ($824.85 billion) sovereign fund, told Bloomberg News the 7.5 per cent growth forecast of China’s government is “still quite high” and “we still have confidence that long-term prospects for China are quite good”.

It might not be to the liking of many in Australia, but as the Chinese economy lifts, so too does our dollar.