The Australian Dollar - should the RBA intervene?

[TulipFX]

Tulip, thank you for succinct explanation. So should we expect eg the SP of the big miners to continue to be thrashed as long as the $A remains high?

I don't know.

Remember that the stock prices are quoted in AUD. It is like how commodities are quoted in USD. A fall in the USD raises commodity price caeteris paribus. Similarly a rise in the AUD is likely to see a fall in an Australian stock price caeteris paribus.

The AUDUSD rises 5%. If the stock price remains unchanged, looking from an USD perspective the price of that stock has risen 5% - even if its quoted AUD price has not moved.

There has been talk over the past couple of years that the Chinese have been stock piling commodities as a hedge against a falling USD - of which they hold a lot of through their purchasing of US Govt Securities.

 

[tayser]

The exchange rate is currently high because there is a high demand for AUDs (ignoring the fundamentals of the USD). There is a high demand for AUDs because AUDs need to be purchased to buy what our exporters are exporting (coal, iron ore, whatever).

Coal, Iron Ore, whatever is invariably priced and paid for in USD, not AUD. The BHPs, RIOs, Woodsides are whinging cos their profits (That they have to report in AUD) are eroding as their income is in USD.

The high AUD is not a sign of future economic malais, it is a sign of current economic strength. The RBA (which like all central banks, should not exist) should do precisely nothing except continue to target low inflation by tightening the money supply.

agreed.

If a central bank wishes to play with the exchange rate of its currency, it simply buys or sells its currency directly on the foreign-exchange market.
Exactly the same effect as selling a bunch of shares causing the share price to go down.

The RBA has intervened on occassion: http://www.rba.gov.au/mkt-operations/foreign-exchg-mkt.html#eight and profited handsomely too.

 

[Uncle Festivus]

I'm still not seeing the commodity supply/demand metric being exerted on the $AU/$US pair at least - very much a counter to the $USD or DX, as per another chart view below. Correlated with the Dow no less, & negative correlation with the DX.....ie more technical risk trade momentum (same as gold, oil etc) than people buying because we have things in demand?

 

[Aussiejeff]

All this media concern about AUD v USD.

Maybe there should be some media concern about the Yuan v AUD - since the Wizards of Oz (various gummint financial sorcerers) appear to be pinning almost their entire future prospects on what the CHINESE can afford to buy from us?

The 18.4% ave loss of Yuan purchasing power for Oz goods & services since June last year must surely be having a significant impact on our economy at the moment - with even worse exchange disparity to come? Hell, there has been an 11% drop in Yuan v AUD since mid-March alone!

Given the inevitable lag in financial stats from "the authorities", this will surely mean a big squeeze on Chinese investment here across the board in the short & medium terms? Less inclined to travel here, buy ANYTHING from here? Hm.....

 

[Uncle Festivus]

Given the inevitable lag in financial stats from "the authorities", this will surely mean a big squeeze on Chinese investment here across the board in the short & medium terms? Less inclined to travel here, buy ANYTHING from here? Hm.....

Yes, very interesting, all the different FX dynamics. Mmmmmm.....now did that just happen to co-incide with a softening real estate market here?

 

[joea]

Forget about mining ,it keeps coming out of the ground.

The tourism industry on the east coast of Australia is "gutted".

If you are running a country, you combine the best mix for the economy.
Obviously that has not sunk in yet!! We do not have 2 years for it to sink in.
They are very slow!!! We do not have 6 months!!!
Cheers

 

[Paulo30]

This Fed gov is totally reactive driven, living for today only. It will be interesting to see what reactive measures come out in next week's Budget.. esp around housing, increasing debt levels, etc.

PS- Besides tourism, the retail industry is also up #*$& creek well and truly.

Forget about mining ,it keeps coming out of the ground.

The tourism industry on the east coast of Australia is "gutted".

If you are running a country, you combine the best mix for the economy.
Obviously that has not sunk in yet!! We do not have 2 years for it to sink in.
They are very slow!!! We do not have 6 months!!!
Cheers

 

[Smurf1976]

Forget about mining ,it keeps coming out of the ground.

The tourism industry on the east coast of Australia is "gutted".

If you are running a country, you combine the best mix for the economy.
Obviously that has not sunk in yet!! We do not have 2 years for it to sink in.
They are very slow!!! We do not have 6 months!!!
Cheers

I think the real issue here is that whenever the mining boom ends, we're going to be hit very hard given that so many other industries are being vitually destroyed.

As anyone who has managed any diversified portfolio (of anything, not necessarily investments) will tell you, when you have rising total output due to one or two components whilst everything else is in decline then that's most certainly not a good sign.

Shares, farms, water in dams, workers, whatever - it's never a good sign when most components are declining but the effect is masked by overall growth due to one or two strong performers. At best, you know you've got something that has become inherently unstable and at serious risk of a major decline should the one or two strong components fail (and sooner or later they usually do...).

It's a bit like being on an aircraft with 4 engines knowing that 2 have seized up completely and another is having problems. Technically, it's still a flying plane and may well land safely but nobody from the captain through to ordinary passengers is going to be too happy with such a situation since the risk is obvious. What's happening to the Australian economic, particularly exports, is akin to this situation. Better hope that last engine doesn't fail...

 

[TulipFX]

At the moment the world is demanding commodities. The exchange rate is helping Australia's comparative advantage in mineral production.

The law of comparative advantage says that two countries (or other kinds of parties, such as individuals or firms) can both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods. Even if one country is more efficient in the production of all goods (absolute advantage), it can still gain by trading with a less-efficient country, as long as they have different relative efficiencies.

http://en.wikipedia.org/wiki/Comparative_advantage

There is no 'good' or 'bad' about exchange rates. Just like there is no 'good' or 'bad' about current and capital account balances. It just 'is'.

 

[tothemax6]

Forget about mining ,it keeps coming out of the ground.
The tourism industry on the east coast of Australia is "gutted".
If you are running a country, you combine the best mix for the economy.

The trend has been to see the 'economy' as some kind of engine, which the government owns an operates, and needs to 'tweak', 'tune' and 'give a bit of a slam', when required.
This is a terrible, terrible thing. The economy is simply the collective term for 'people going about their business'. The worst thing that can happen to an economy is command-control, like in the USSR. The government should stick to its real job - cops troops and judges.

There is no 'good' or 'bad' about exchange rates. Just like there is no 'good' or 'bad' about current and capital account balances. It just 'is'.

Well put.
Although I would say that on the individual level, the exchange rate can of course be good or bad, for instance if one is going on holiday.

I think the real issue here is that whenever the mining boom ends, we're going to be hit very hard given that so many other industries are being vitually destroyed.

But there is nothing that can be done about this. Any government interference invariably causes more damage than they claim it will improve. For instance, the government could choose to tax the miners more, and then throw the money at various boondoggle projects. This would merely hurt our income in the booming section of the economy, and create new investments that private citizens have not indicated (through the market) that they need.
The best that can be hoped is that the boom continues for a while longer. When it stops, we will have a recession. Hopefully, when we do, the government will just let it happen. A recession is precisely the time when a nation reorganizes the allocation of resources across its industries to correct imbalances. The worst thing that could happen is if when the boom ends, we have a bunch of keynesians and socialists in charge, and we get a 1929 recession instead of a 1920 recession.

 

[Smurf1976]

But there is nothing that can be done about this. Any government interference invariably causes more damage than they claim it will improve. For instance, the government could choose to tax the miners more, and then throw the money at various boondoggle projects.

I follow your argument but there must be some reason why just about every other government is protecting domestic industries in one way or another?

I'm not against the so-called "level playing field" but the reality is that practically every other significant country is at least trying to tilt it in their favour, with Australia being one of the few that isn't doing so.

 

[tothemax6]

I'm not against the so-called "level playing field" but the reality is that practically every other significant country is at least trying to tilt it in their favour, with Australia being one of the few that isn't doing so.

Sure, other countries do have interfering governments, but I wouldn't say this tilts things in their favour. Take China for instance: people have been forever that the currency interference 'helps china because it boosts exports'. In reality, the Chinese citizens are just getting jipped. Instead of being able to buy cheaper imports, or to enjoy the products they make themselves, all that happens is a bunch of US gov bonds pile up on the floor of the PBOC. The US effectively gets subsidized cheap imported products and doesn't have to pay China for them. And China just ends up with market distortions that will hurt it down the road.

 

[Uncle Festivus]

Looks like we are just 12 weeks away from a technical recession, although a lot of people & busininesses will say it's already here? And the boofhead economists still talk about interest rate rises!

Australian manufacturing activity contracted in May for the third consecutive month, dragged down by weak domestic demand, cheap imports and the strong Australian dollar, a survey shows.
The local currency stayed above 104.50 US cents for the whole of May, hitting a post-float record high of 110.11 US cents on May 3.
The Australian Industry Group/PriceWaterhouseCoopers Australian Performance of Manufacturing Index (PMI) fell 0.7 points in May to 47.7.

Readings below 50 indicate contraction in activity.

http://www.theage.com.au/business/strong-dollar-dents-factory-output-20110601-1fg0v.html

Figures out today confirmed the slowdown that's been signalled since January when much of Queensland was under water and the big coalmines and other pits stopped shipping commodities to the hungry markets of Asia.

The economy shrank 1.2 per cent in the first three months of the year, the first negative result since the December quarter of 2008 when the world was emerging from the global financial crisis.
The March quarter contraction is the largest since the first three months of 1991 - the last time Australia endured a recession.

Read more: http://www.theage.com.au/business/national-economy-shrinks-12-20110601-1ffjw.html#ixzz1O0Qy7Xby
​

 

[Aussiejeff]

Looks like we are just 12 weeks away from a technical recession, although a lot of people & busininesses will say it's already here? And the boofhead economists still talk about interest rate rises!

http://www.theage.com.au/business/strong-dollar-dents-factory-output-20110601-1fg0v.html

Read more: http://www.theage.com.au/business/national-economy-shrinks-12-20110601-1ffjw.html#ixzz1O0Qy7Xby
​

Yeah, all this "Oh, what a surprise - the data is "worse than expected"" crap from "expert" so-called economists (many with bullish vested interests in keeping the champagne bubbles from popping) ... cracks me up.

Many obviously couldn't see the GFC coming, nor could many apparently foresee this ongoing "worse than expected" data coming along either!

So how the hell can they STILL predict "Oh, the economy is growing strongly - there will be much better times ahead - explicit to nth% growth points, to be precise" based on the evidence of their pathetic forecasting to date?

Laughable in the extreme. The puppet media falls for it every time.

 

[Paulo30]

Economy slumps, but rates unlikely to follow suit..

http://www.smh.com.au/business/economy-slumps-but-rates-unlikely-to-follow-suit-20110602-1fh5j.html

 

[Uncle Festivus]

Meanwhile, the retail & manufacturing recession gets worse..........

The latest ABS Retail Trade figures show that Australian retail turnover fell 0.1% in December 2011

But, things aren't so bad afterall......good for savers at least?

Australia’s central bank unexpectedly kept its benchmark interest rate unchanged as it assesses the effect on the nation’s economy of its two previous cuts.
Governor Glenn Stevens and his board left the overnight cash-rate target at 4.25 percent, the Reserve Bank of Australia said in a statement in Sydney today. The decision was predicted by three of 27 economists surveyed by Bloomberg News. The other 24 forecast a quarter percentage-point reduction.

Points to the number crunchers at ANZ this time - do they actually pay economists to get it wrong repeatedly?

“The global risks are a little lower than at the time of the December rate cut,” Australia & New Zealand Banking Group Ltd. economists Craig Michaels and Katie Dean, who predicted a pause, said in a research report before today’s decision.

More jobs gone - must be bad, from the ;Millionaires Factory' of all places??

MACQUARIE Group has flagged job cuts of around 10 per cent at its investment banking arm as it foreshadows a significant decline in full-year profit.

So that's retail, manufacturing and finance in or going into recession? Keep going Glen (an economist no doubt), you want to hope that China keeps doing all your hard work for you?

 

[notting]

Their not leaving much for the rest of the country!
Not even the miners benefit from this.
So we sell all our resources, which is about all we're good for, for less. Then one day try to survive with butchered retail, tourism and pretty much everything including international investment in shares etc.
:dunno: They must really believe in Euroland! Maybe that's a positive!

 

[Julia]

So much for the learned views of economists. Katie Dean from ANZ was the only one I heard suggesting there wouldn't be a cut.

I wish all these talking heads would just shut up. Their endless ruminations on "will the Reserve cut or won't it?" are pointless and they're wrong more often than they're correct.

 

[DocK]

So much for the learned views of economists. Katie Dean from ANZ was the only one I heard suggesting there wouldn't be a cut.

I wish all these talking heads would just shut up. Their endless ruminations on "will the Reserve cut or won't it?" are pointless and they're wrong more often than they're correct.

Can't remember exactly who it was on YMYC on Sky the other night - Gary Stone and Howard from Team Invest I think - but they both said that they felt there should be a rate reduction, but felt that the RBA would be "keeping its powder dry" for the moment. So that's at least another couple who got it right.

 

[notting]

There Reserve is very focussed on the cost of houses.
The talking heads are all on about the patchwork economy. I don't know why they rarely mention the cost of a house, especially given it seems to be the main thing that moves the reserves hand!
The reserve seems to have had an agenda to bring that down regardless of what ever els it brings down with it! Why bring the rate down when the banks were not going to pass it on anyway!?
Probably won't find that in their notes!!!
"OK banks, not going to play ball? - suck on this!!"
And besides - A hut in WA still sets you back about 600K!
I'd like to see the banks all raise rates a little now in response, that would be funny. The audacity of them!!