Carry trades diminish as prospects of US economy improve


The Australian Dollar has been cut by 6.3% against the greenback, due to the hawkish comments from the Fed committee about an early interest rate hike. This is playing in the favour of the Australian Dollar, as the overvalued (by historical standards) is starting to normalise, which will help the export market. However, due to the commodity prices being weak (from firms flooding the market with higher quality produce), firms are not benefiting. With firms not benefitting, workers will not benefit (in terms of wages) and thus there will be less spending in the economy, affecting growth. In addition, China's growth is starting to cool which will lower demand for commodities, Australia's largest export market is China, and a slowdown In China will affect Australia drastically. 

Janet Yellen (Chairwoman of the Federal Reserve) has stated that interest rates are likely to rise earlier than expected. Much of the strength of the greenback against the Australian Dollar has been attributed to capital inflows for US treasuries as the anticipation of an early interest rate hike increases. In addition, another factor for the strength is that the 'carry trade' is starting to diminish, signalling that the market is pricing in an early interest rate hike. Growth has been strong as shown by recent data (Actual: 4.6%, Forecast: 4.6%, Previous: 4.2%, 26/09/2014), and unemployment claims have declined (Actual: 293K, Forecast: 294K, Previous: 281K, 25/09/2014). This signals that the labour market is tightening, which should increase consumer spending and thus the US should achieve further growth.


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