JG,
Forex exchange rises and falls and effects on an economy are complex.
It helps our exporters if the Australian Dollar is falling - our goods become cheaper over seas. But a falling dollar only occurs because our economy is weak. Investors want to invest in economies which are strong, which means a rising currency.
No country has a strong economy without a strong currency.
Take, the U.S. - the US$ is weak because it's economy is weak.
With a rising currency, Australian asset classes become cheaper for overseas interests to buy.
The Melbourne real estate market has been underpinned for many years to some extent by Chinese buyers. They can buy Melbourne units and even if the units do not rise in price, because the Ozzie Dollar has been rising they can resell the properties and make a forex gain. So when those investors see the Ozzie Dollar start to fall - they're inclined to sell their properties and repatriate their funds.
Same with the stock market. While the Ozzie Dollar is rising - Australian stocks become attractive to overseas investors because they can make a profit so long as the Australian stock market is flat or rising gently, or even falling gently. But when the Ozzie Dollar starts to fall - Australian assets start becoming less and less attractive, and overseas investors start to pull their money out of the country.
While the Australian Stock Market rose off the bottom in March 2009, the Ozzie Dollar was also rising. American investors in EWA (the ETF for Australian Shares on the American market, got a double whammy - rising stock prices multiplied by a rising Ozzie Dollar.
When the Australian Dollar starts to fall, and our stock market starts to fall, the overseas investor is faced with a double issue - the fall is magnified by the fall in the Ozzie Dollar - so they pull out fast and the market is faced with a liquidity squeeze.
Here are three charts to illustrate: the XJO, Ozzie Dollar, and EWA (the ETF tracking Australian stocks on the American market, in U.S. Dollars).
When the Ozzie Dollar is falling it is a disincentive for American investors to invest in Australia. Any losses are magnified by the falling Ozzie Dollar
Similarly, when the Ozzie Dollar is rising, it is an incentive for investors to invest in Australia. Any gains on our stock market are magnified by the rising Ozzie Dollar.
I hope that helps
Redbacka
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