Market Overview

The U.S. Would Love to Have Australia's Problems

Australia is facing the threat of inflation, as demand for the products the country mines has revved up the economy.

Australia's currency is already up significantly this year, having appreciated 26% against the U.S. dollar, according to Bloomberg.

The Reserve Bank of Australia has declined to raise rates this year. That may prove costly should inflation spiral out of control before the RBA can act.

Increasing demand for Australia's coal and iron ore exports, along with the increase in price of these commodities, has driven an investment boom in the country. Australia is exporting a significant percentage of these commodities to nearby economic powerhouse China.

The RBA's governor Glenn Stevens should pay close attention to the recent economic events in Turkey, a country which saw its inflation skyrocket in just 30 days.

While some economic commentators in the United States have warned of inflation entering the American economy, Australia's problem is one the United States would love to have. Fears of U.S. inflation are primarily based on the belief that there will be a continuing decline in investors' willingness to hold the dollar, as the U.S. government's debt balloons and the economy stays stagnant.

Australia's inflation, on the other hand, is driven by rapid economic growth and an increasing velocity of money.

If the RBA raises interest rates, it may be bullish for the Australian dollar. Traders looking to play Australian dollar strength might consider CurrencyShares Australian Dollar Trust (NYSE: FXA). FXA attempts to return a value corresponding to the general strength of the Australian dollar, and may rally if the Australian dollar appreciates.

Alternatively, traders may seek gains in the New Zealand dollar. WisdomTree Dreyfus New Zealand Dollar Fund (NYSE: BNZ) tries to correlate with the general strength of the New Zealand dollar, and may rally if the Australian dollar rallies, as the New Zealand dollar has correlated with the Australian dollar in the past.

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