Why the risky instruments aren't attractive for the investors at the moment

When there are no geopolitical risks, investors are on a wave of "buy" risky assets. Risk assets are classified as instruments that carry high profit at a relatively high risk. Such assets are stocks, indices, and a relatively large number of currencies. Developing countries currencies are classified as highly risky because the countries that issue them are not fully developed and are prone to political turmoil, have no stable interest rate, have high inflation and/ or unemployment, and so on. Developed countries are risky currencies are AUD and NZD. Central banks and the two countries have historically maintained a high interest rate compared to other developed countries. Then why investors have been out of these currencies lately? The first and perhaps the most important reason is the historically low interest rates of these countries. In Australia the interest rate is 1.5% and in New Zealand 1.75%. In order to alleviate the exports from the countries, central banks had to lower their currencies and the interest rate was the central instrument for the control of currency power.
When the interest rate drops, the bank stimulates consumers and companies to take more credit. Which in turn increases the volume of currency in the country. Increasing volume leads to an increase in inflation, which on the one hand reduces the purchasing power of the currency. This, on the one hand, has a positive effect on exports from the country. For example: In the trade relations between Australia and China. We assume that the interest rate in China will remain unchanged, and that in Australia will drop from 8% to 1.5%. At an 8% interest rate, AUD / CNY was priced at 6,667 chinese yuan for 1 Australian dollar. At an interest rate of 1.5% AUD / CNY is 4.96 yuan per Australian dollar. Here we see the difference in the purchasing power of the yuan against the Australian dollar at Australia's interest rate differential. If one ton of iron ore in 2008 and interest rate in Australia 8% worth China about 592 yuan at an interest rate of 1.5% 1 tonne of iron ore worth China about 440 yuan. The decline in AUD will bring lower profits to exporters, but this will be fully offset by the rise in demand for iron ore due to the weakening of AUD.

But if we exclude the export companies in Australia, the other sectors suffer from the weakness of the currency. It is much more expensive to buy foreign goods for the average citizen, because in order to import goods into the country, the company has already paid a higher amount of currency.The unprofitable for investors now comes from the fact that an economy that depends heavily on exports has reduced its interest rate to a record low. This makes it extremely vulnerable if we say the Chinese economy suffers a crash.

Australia's exports are mainly focused on China, if China's economy is reversing its upward movement and plunging into recession, it will have a very negative impact on Australia. Investors like diversification. If an economy depends so much on its exports and it is mainly orientated towards one country, the risk for them is rising. Another reason is that interest rates in countries like the US and Canada are similar or similar to those in Australia. The difference is that the US and Canada rely not only on their exports but on many other sources of income. In fact, investors will have the same or almost the same income from an investment in the US or Canada than in Australia with a significantly lower risk. The decrease in cash flows to Australia negatively affects the currency. Searching for USD and CAD will raise the value of currencies to AUD.

Trader Bozhidar Arabadzhiev

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