Commodity prices have been volatile reflecting concerns about future growth, and forecasts for Australia’s growth have weakened. Now the currency market is starting to catch up with this reality. The euro has outperformed the Australian dollar for the first time since 2008.
It also highlights the broader theme of Asian economies slowly starting to fall out of favour with more developed western economies. There has been much talk about not only Australia’s growth, but global growth being leveraged to China.
The euro is comfortably gaining on the weakening Australian dollar, up more than 17 per cent for the year. Admittedly, the Aussie dollar has been pushed lower against all major currencies as the Reserve Bank continues to cut rates. Also helping the Aussie lose value against trading partners is hedge funds betting it has further to fall.
Despite the fundamentals driving the Aussie dollar’s movements, data from the Organisation for Economic Cooperation and Development suggest the euro remains undervalued by about 24 per cent against the Aussie dollar, based on purchasing power parity.
The eurozone is running a comfortable trade surplus due to its high export of manufactured goods, mostly cars and machinery, providing continuing support for its currency. Running a trade surplus will contribute to ongoing support for the currency.
The MSCI European index, led by Germany is up over 8 per cent this year with the Australian index just posting a better return at 9 per cent. In comparison China’s main index, the Hang Seng is down 1.92 per cent.
Investor confidence has slowly returned to the European Union. This can largely be attributed to the support of the IMF and the guidance of Mario Draghi, president of the European Central Bank.
Recently, the economic news out of Europe hasn’t been as bad as anticipated and is providing some additional comfort for the region. Last week following the ECBs monetary policy meeting, Draghi suggested some economic indicators confirm activity is stabilising.
It is a distinct contrast to what we are seeing here in Australia, with major economic indicators suggesting our economy is worsening.