The Aussie dollar opened at 80.67 US cents this morning on the news that the Bank of Japan would leave interest rates at their current (very low) level. After its two-day meeting, BoJ Governor Toshihiko Fukui signalled that interest rates will remain low for some time yet.

“Going forward, we will maintain the accommodative policy stance backed by very low interest rates for now,” Fukui said.

Carry traders consequently sighed in relief, and set about rebuilding their carry trade positions.

For those not in the know, a carry trade (in a foreign currency context) is where you borrow and pay interest on a low-yielding currency (Japan) in order to buy a currency else that has higher interest (Australian/ New Zealand currency). This, of course, should not be profitable according to most Economics 101 courses, but Henry is assured that there’s plenty of money being made doing it.

Seeing as the interest rate differential is effectively the profit margin, the BoJ’s newfound dovishness meant traders, now convinced that the differential will remain, sold Japanese yen and bought more of the Aussie dollar.

According to minutes of their most recent meeting, released yesterday, the Bank of England isn’t likely to hike rates in the near future despite inflation remaining stubbornly above the 2% target (2.8%, in fact). In fact, the minutes showed one Monetary Policy Committee member actually voted for a rate cut this month, whilst the other eight members agreed on unchanged rates. As recently as early March, financial markets saw an 80% chance that rates would rise by around mid this year.

Australia, it appears, is the odd one out, with Assistant RBA Governor Dr Malcolm Edey’s recent speech showing that we remain defiantly on the hawkish side of the ledger.

One of Henry’s favourite economics journalists, Martin Wolf, recently shone a light on the booming economies of China and India. The analysis is intriguing and certainly bodes well for our domestic economy:

India’s outstanding sector is services; China’s is industry. Employment growth outside agriculture is low and the share of agriculture in employment still high: 47 per cent for China and 57 per cent for India in 2004.

China’s productivity performance has been astonishing, largely because of rising output per worker in industry, though it has also done well in agriculture and services. India’s productivity performance is also quite good, due overwhelmingly to services.

Read more at Henry Thornton.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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