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Chart of the week: IS THE FALLING PACIFIC PESO TAKING THE FUN OUT OF TRAVEL AS WELL AS FUN-DAMENTALS?

24 May 2019

Bob Cunneen, Senior Economist and Portfolio Specialist

 

Sources: Datastream.

The Australian dollar (AUD) seems to be living up to its nickname as the ‘Pacific Peso’. The AUD’s recent slide below 0.69 against the US dollar (blue line) has seen the Pacific Peso return to levels similar to the Global Financial Crisis a decade ago. For those with overseas travel plans in 2019, the current Pacific Peso’s weakness is taking some of the fun out of travel.   

Yet this currency weakness does reflect the fundamentals. The Australian economy has disappointed over the past year with economic growth slowing to a subdued 2% pace and the unemployment rate grinding along at 5.2%. By contrast, the US economy has been a strong performer with economic growth at circa 3% and the US unemployment rate at only 3.6%.

Indeed the Pacific Peso’s weakness is evidenced by how low Australian government bond yields are compared to their US counterparts. The Australian government 2 year bond yield stands at only 1.2%, some 1% below the US government 2 year bond yield. Given such a sharp negative yield gap (red line), global investors find the US dollar as a more attractive travel destination than Australia.  So until Australian economic fundamentals start to outperform the US, we need to learn to have more fun by staying at home rather than travelling overseas.   

 

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