Australian dollar strongest performing major currency this year

Aussie dollar up

A weakness in the greenback due to US policy uncertainty boosts the Australian dollar to trade at US74.8c on Friday morning. Video courtesy ABC News 24.

Holidaymakers are starting the year with news to make an overseas trip harder to resist: the Australian dollar strengthening to become the best performing major currency in the world.

The Aussie reached one-month highs of US75.1¢ on Thursday after US president-elect Donald Trump sent the greenback tumbling by making scant mention of his promised economic stimulus plan at his first press conference since the election. The local currency had softened slightly to US74.78¢ on Friday afternoon.

A 3.6 per cent rally against the greenback this year means an Australian travelling to the United States with a $2000 budget will have $US52 more spending power today compared with January 1.

And ANZ economists predict the dollar could surge as high as US78¢.

But it's not just Trump-related volatility helping the local currency: the Aussie has also jumped 3 per cent against the euro, 5 per cent against the British pound, 1.9 per cent against Japan's yen and 1.35 per cent against the New Zealand dollar since January 1.

Ray Attrill, NAB's co-head of FX strategy, said the Aussie had been undervalued since the middle of last year and was starting to correct.

NAB's modelling suggested fair value of between US75¢ and US77¢ in recent months, when it had been trading as low as US72¢.

"Rather than just saying it's a [US] dollar thing, which to some extent it is, it does suggest that the Aussie was beaten up unjustifiably," Mr Attrill said.

There were fears that major capital outflows from China would resume in January with the resetting of government-imposed annual limits. That would have pushed down China's yuan and damaged the Australian dollar and other Asian currencies.

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That sell-off had been priced in to the Aussie, but the flood of money out of China failed to resume, Mr Attrill said, resulting in an upward correction for the local currency this month.

Mr Attrill said this, together with favourable iron ore and gold prices, made the Australian dollar the strongest performing of the world's 10 most-traded currencies this year, outstripping the euro, yen, pound, Swiss franc, New Zealand dollar, Canadian dollar, Swedish krona and Norwegian krone.

However, the Australian dollar remained largely at the mercy of Mr Trump, Mr Attrill said, with the president-elect able to reverse its gains with a single tweet.

"It only needs Trump to say: 'I'm going to unveil plans for major infrastructure spending next week', and then you'll see the US rates market selling off and the US dollar will start strengthening again and the Aussie will probably become weaker," he said.

"Everybody think politics is more important than hard economics at the moment."

ANZ's head of foreign exchange strategy, Daniel Been, said the Aussie could test US78¢ by March, off the back of broadening global growth and rising inflation.

"The primary obstacle to it at the moment is market perception and the way markets are reading Trumponomics as US and US dollar-bullish," Mr Been said.

"The risk is that at this time we have an unusual break between the performance of global growth and the Aussie dollar because the US dollar is being bought as the primary growth asset in the world rather than the Aussie."

There could be a reversal in the Aussie's fortunes if that trend continued.

However, Mr Been said the market's expectation of Mr Trump's ability to implement his policies was very high and vulnerable to disappointment.

Big Mac index

The Economist magazine on Friday revealed its annual "Big Mac Index", which suggests the Australian dollar is 15 per cent undervalued.

The light-hearted index compares the cost of a Big Mac in different countries, using the theory that exchange rates should adjust so that identical products or services cost the same in any two countries to identify which currencies are overvalued and undervalued.

The McDonald's burger costs $US4.28 ($5.80) in Australia and $US5.06 in the US, suggesting the Aussie dollar is 15 per cent undervalued.

Only three currencies - the Canadian dollar, the Israeli shekel and Uruguay's peso - were less undervalued than the Australian dollar. The index suggests only four countries - Switzerland, Norway, Sweden and Venezuela - have an overvalued currency.

This article Australian dollar strongest performing major currency this year was originally published in The Sydney Morning Herald.

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