Australian dollar resilience

Find below a fascinating new note from Westpac’s Huw Mackay (Phat Dragon), who has a brain the size of a planet, on why the Australian dollar has  shown continued resilience, even though, thankfully, he does not buy into the “safe haven” tripe:

We principally highlight the economy’s improved external financing position (both in terms of scale and composition). FX reserve diversification flows are a symptom of Australia’s proven macroeconomic resilience, the scarcity of global risk free assets and the nature of our external financing requirements post GFC. Root causes are to be found in domestic savings-investment behaviour, which determine the nature and scale of our required interaction with the rest of the world.

I’m not as sanguine as Mr McKay on our external position and think the reserve diversification story – Australia’s relatively less dirty shirt – is a big factor in the currency. Moreover, we have this amazing circumstance of enough economic strength combining with enough weakness to give investors reassurance but still see bond prices rocket, offering great capital returns. Our deflationary boom.  I don’t know how long that can last. Still, the external position has improved a lot and if it stays solid so may the flows.

Er 20120628 Bull Aud and External Financing

Comments

    • I knew it was true – we really are ‘different’ from the rest of the world! Ha Hah!

  1. I understand this but the bond markets in Europe are open and both Spanish and Italian yields are shooting up again.

    6.95% for Spain. 6.24% for Italy. Both above what is considered unsustainable. How is it that this can cause the AUD to spike and markets to do anything but drop?

    I suspect it is the fact that markets are pretty much only trading interventions now.. but still. Spain and Italy needing bailouts would overwhelm even the money printers.

  2. Volume vs price must be winning. It must be the big guys pumping out the iron ore and coal, as on the sidelines the small miners and explorers are getting hammered on the ASX.

  3. I think the resiliance has nothing to do with “us” but more to do with the policy of the US to weaken their currency and the problems in the Euro.

    We are just bobbing whereever the tide takes us, and as long as these guys want a weak currency (for the foreseeable future) we will experience a high dollar.

    Wouldn’t be surprised if it lasts a few more years.

    • Wild swings in the exchange rate (either way) will mean certain recession. From either imported inflation, or the flipside, a huge Current Account Deficit.

      • “Wild swings in the exchange rate (either way) will mean certain recession.”

        Interesting observation tweet and likely very true. I know thi8s is chicken and egg stuff but if the exchange rate rises it will be because of an inflow of spec capital or sales of assets. So the CAD will get financed and, of itself, will not cause a recession if the currency is rising.
        However we will continue to have the hollowing out of our industry (if there is any left), the further destruction of rural Aus, etc etc (need a rant from Lorax to list all the bad effects!!!)
        That will cause the recession.

        From a practical viewpoint I’d appreciate your thoughts on this.
        If the currency rises it means there is still plenty of money coming here one form and another. However this is still likely accompanied by the widely tipped 1% reduction in interest rates. Again given the domestic investing environment that says to me increased consumption and at worst (?) stable house market.

        If the currency falls, it means capital flow is failing for whatever reason, which just means a full blown recession accompanied by staggering inflation rates as a rsult of the A$ fall and ‘The End of Cheap China’. The RBA will ‘appear’ to raise rates a little but not much in an apparent inflation fighting stance. However RAT rates will be wildly negative. To do anything else given the debt levels will smash the economy, After an initial hammering in asset values the tide will turn and NOMINAL prices, in anything that has any lasting use or value, including houses,, will rise rapidly in value.

        Just some thoughts!

      • I agreed with you. I think that the currency will only rise because of the continued purposeful devaluation of the USD and Euro. While everyone is devaluing their currency, there must be a loser, and that will be us! I.e. the status quo. It’s like they are trying to export their unemployment to us, they may succeed. I think this will continue for a while, at least a year or two. Little inflation, asset prices stagnate.

        If/Once the rate goes down, we will begin to see inflation in “items”, partly because of imported goods rising but also because of our hollowed out industries and our dependance on imports. The big four will be in the squeeze and not allow a negative rate of return. The consumers will shut down and credit will get sticky. Higher unemployment with inflation, and asset prices stagnate.

        The RBA will continue to reduce interest rates to keep our exchange rate from going higher, but I am guessing would want people to use the oppurtunity to pay down debts rather than increase indebtedness.

        Ultimately I think the RBA want a lower exchange rate but with more of a phased approach, so that interest rates can slowly increase rather than play catch up to inflation.

        Meanwhile the politicians think about how they can win the next election.

  4. Ahhhhh We are ‘different’

    We have the pretty much the highest level of natural resources per capita in the world. Even better we are willing to flog them off to maintain our lifestyle and keep the appearance of relatively low debt although Gross exterrnal debt of about $1.2 T is not to be sneezed at. (Sorry it’s a while since I checked the gross and Net debt numbers. However we haven’t run any CAS surplus to make any of it go away)

    This, combined with a relatively stable sort of democracy and China loaded up with USD they are desperately trying to swap for ownership of resources makes us very different to the rest of the world.
    The rest that Huw talks about is just a result of this basic fact.