The Australian dollar took a move upwards on seemingly bad news. Investment in capital goods was down.
The reason why the dollar got stronger was that investment in the manufacturing sector was up. An unexpected event. This is seen as good as Australia tries to get over dependence on the mining boom.
Not that long ago it was fashionable to talk about a 'two speed economy'. The mining sector forged ahead, driving overall GDP growth, while manufacturing shrank. It was more accurate to describe a 'multi-speed' or 'patchwork' economy as different states and industries met very different fortunes.
So this is good news of sorts, but still points to an overall downward trend in Investment (a component of Aggregate Demand).
The story does help us understand important influences on the exchange rate. To understand why the exchange rate changes on this news is important:
1. The exchange rate is determined by the demand for and supply of the Australian dollar.
2. A major reason to demand Australian dollars is to buy iron ore (Australia's largest export) and the price of iron ore has fallen 28% in the last year. Therefore buyers need fewer dollars and so demand for dollars falls.
3. Another reason to buy dollars is to invest in Australian businesses. If an economy is growing strongly the chance making a profit is higher.
4. The new figures on investment in manufacturing imply that Australia will grow faster than was previously expected.
5. Therefore confidence in Australian future profits has risen, this will mean greater demand for investing in Australia in the future, and so the demand for dollars rises now.
6. Demand for Australian dollars rises now because some speculators will expect the dollar to be worth more in the future and they seek to buy dollars now to make a profit reselling them later.
It's easier on a diagram!
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