Since the first quarter of 2020, when the Australian dollar reached a low, most analysts have been blaming China for our current predicament. It is believed that if China continues to pour money into the country it will affect its growth, thus triggering another depreciation. The idea is to counterbalance the fall in the Aussie dollar so that our exports increase and prices remain low.
I don’t believe the theory. What I think is that if the Chinese economy continues to struggle then the government is going to be forced to keep borrowing money to bail out their economy.
Instead of spending billions of dollars on stimulus and re-engineering, the government should be focusing on consumer prices and the level of interest rates. When the Australian dollar is at one half of the American dollar level, you can expect it to rise further, as more businesses in China decide that it is a good investment. If the level of interest rises too high, it will prevent the flow of dollars into the country, which is what China really needs right now.
Consumers and businesses are spending more money than ever before and this needs to be considered when interest rates are raised. Since the American financial system is already weakened, raising interest rates and money supply, will only cause further inflation. We need to focus on something else, not on US dollar exchange rates.
In fact, the new Chinese leadership has already started to reduce the amount of foreign currency they are buying from the US and using it to purchase Australian dollars. If the Yuan becomes a more accepted currency, there is no way that a company in Australia is going to accept US dollars and trade with a company in China.
Stop and think about this for a minute. In a world dominated by nations and companies, would you prefer to invest in a company in Australia and get an interest rate of around 5% or in a Chinese company that has the same price but gives you more value? Think about it.
It may seem silly to take a look at foreign exchange rates when you are living in Australia, but it is the most important factor for every country to look at when making decisions in today’s world. It helps us understand how other countries are doing and we can make informed decisions on future investments.
The latest research shows that the more you own foreign currency, the more difficult it becomes to buy stocks, bonds and other assets. The more invested you are in a particular currency, the less likely you are to do so.
In an economy where interest rates are zero, raising them and the money supply is crucial, especially in China, where money is one of the most coveted commodities. Rising interest rates and the potential growth of the domestic Chinese economy, coupled with the expansion of their number of businesses, is going to create an increasing demand for the Australian dollar.
I am happy to see that the Australian dollar is now almost back at its all time high, so I am happy too. But remember to take a long term view of things and not just look at the short term impact of a weakening currency.
Whether you agree with me or not, there is a lot to be learnt from the increase in the Australian dollar. Keep your eyes open and let me know what you think in the comments box below.