In a recent talk, Glenn Stevens, Reserve Bank of Australia governor, touched on the key role the Australian dollar plays in times of strife. He said if there were a serious decline in China, the Australian currency would “probably” fall, providing a much-needed boost to the domestic economy.
The logic was obvious. Because of Australia’s vast mineral wealth and large mining industry, the “Aussie” is regarded as a commodity currency and, by extension, closely correlated to Chinese growth. As China slows, the Aussie falls and trade-exposed sectors get a boost from a lower exchange rate.
But Mr Stevens also outlined an alternative scenario in which another financial crisis – a break-up of the eurozone – might result in a larger flow of funds into Aussie-denominated assets. “In that case, our problem might be not being able to absorb that capital,” he said.