BORIS SCHLOSSBERG<br /><strong>DIRECTOR OF CURRENCY RESEARCH, GFT</strong><br /><br />OVER the past several months, the Australian dollar has been the most appealing currency for the recovery trade. Unlike its G20 counterparts, the Australian economy barely felt the blows of the global recession, registering only one negative quarter of growth before rebounding in the second quarter to record a 0.4 per cent gain. Australia has been the principal beneficiary of Chinese demand for commodities, which has been the key factor in sheltering its economy from the worst recession in the industrialised world since the Second World War.<br /><br />The Australian economy also benefited from the Reserve Bank of Australia’s (RBA) quick action on interest rates. By slashing rates from 7 per cent to 3 per cent in a little more than a year, the country’s central bank was able to mitigate the negative impact on the housing sector. Since most Australian mortgages have an adjustable rate rather than a fixed one, Australians were able to reduce their monthly bills for housing and so expand their discretionary income.<br /><br />Therefore, the present consensus view in the currency market is that the RBA will be the first of the G20 central banks to raise rates and many market players anticipate that a hike could come before the end of 2009.<br /><br />Last Friday, RBA governor Glenn Stevens did little to dispel that idea by stating: “What we have at the moment is an emergency setting. At some point, you are going to have to make a response to move away from the emergency setting.” The Australian dollar skyrocketed in response to those comments, reaching a year-high against the buck.<br /><br />Is this optimism justified? No. I think that any talk of an RBA rate hike is woefully premature and my scepticism is based on the same dynamic that was responsible for the Aussie’s meteoric rise – China. I believe China’s expansion is unsustainable without a pickup in consumer demand from the West, and its growth may have peaked in the second quarter of 2009.<br /><br />The recent turbulence in the Shanghai index suggests that many equity investors agree with that assessment. China was the locomotive that pulled the Aussie higher this year, but now it could easily reverse course, dragging the Australian dollar below the $0.80 mark as optimism over the recovery trade cools considerably.<br /><br />Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read their daily commentary at www.GFTUK.com/commentary or e-mail BorisandKathy@gftuk.com.