The two compelling factors driving the Aussie dollar
The two most compelling fundamental drivers for the Aussie dollar in 2011-12 are world growth and commodity prices.
It is directly affected when world stock markets rise and fall and is significantly affected when commodity prices rise and fall.
In 2008-09 when the global financial crisis (GFC) hit, fear gripped investors and they turned to currencies such as the US dollar, Swiss franc and Japanese yen as safety currencies.
Even though the Australian economy was outperforming most developed countries, the price of the Aussie dollar sank quickly.
A great example of the Aussie dollar's direct correlation to commodity prices is the West Texas Intermediate oil price in December 2008, the height of the GFC. It was $US35 a barrel and the Aussie dollar was 0.65c.
Other home-grown factors also affect the price of the dollar, including national debt, retail spending, interest rates, unemployment levels, inflation and wages.
Overall the price of any country's currency will be a direct reflection of the overall performance of its economy and the correlations to cross-currencies it trades against.
Simply put, if the Aussie economy is performing well and the US economy is performing poorly, the price of the Aussie dollar will reflect this and move higher.
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