Houses and Holes is right on the AUD we need to be careful what we wish for. We do not want to be a reserve currency – already we are seeing the strength of the AUD reallocating resources around the economy. HH’s post on Dutch disease a week or two back highlighted this and it surprised me that the mainstream media never picked up on Julia Gillard’s comments and is not making more of this. All we need to do is look at tourism as an example. Inbound is flat over the past half dozen years while outbound has doubled. That’s just the thin end of the wedge.
But HH’s blog lead me to have a look at the AUD and I’d have to say that, for the moment, the AUD is certainly holding up well back at .9800 and while I can see a move to .9400 or .9500 it is still the poster child of global currency markets as the leveraged China bet. If we say AUD/USD is “CHINA” and AUD/CHF is “RISK”. You can see in the chart below where the AUD/USD is the light blue line and AUD/CHF is the red line that “CHINA” is holding up but “RISK” has absolutely tanked.
Where you see the carnage in risk off events, it is not necessarily directly in AUD/USD but in everything as correlations in all markets move to 1. You can see that here in the September 2008 to March 2009 period. I think this is the key. In a seriously risk off world there are no safe havens. All positions above index get exited and the AUD will suffer accordingly as the world’s favourite punt. That is, the size of positions relative to index weight are huge and so in exiting hit it relatively harder than other assets relative to any one days flow of trade.
But I am fairly sure that in the half decade or so since I last sat down with the world’s big investors and central banks, of our region in particular, that their affection for the AUD would only have grown given the impact of China and the resource boom. These guys won’t get flipped out of AUD positions on a whim. Most likely they will be buying if it falls into the low .90’s high .80’s region. Only a complete reappraisal of the Chinese growth/urbanisation story or massive reweighting toward a global double dip recession will threaten their long term view on the AUD.
If however we do get either or both of these events I’m fairly sure we’ll get our automatic stabiliser back. At least I hope so.