Minack: Foreign central banks adding 15 cents to Australian dollar

See the latest Australian dollar analysis here:

Macro Afternoon

From the AFR:

Foreign central bank appetite could be adding up to US15¢ to the value of the Australian dollar according to one strategist, as the market awaits commentary from the Reserve Bank of Australia on the high dollar following its rates meeting on Tuesday.

Morgan Stanley strategist Gerard Minack wrote in a note to clients this morning that offshore central bank inflows could be pushing the Australian dollar by between US10¢ and US15¢ beyond its fundamental value.

The McKibbin proposal needs a national debate. Right now we are the new Switzerland and need policies to cope with it.

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  1. Potential for this to get worse, presumably? Yields on many developed countries bonds only look set to go down, potentially more QE, continued troubles in EU meaning noone wants to be in THOSE bonds etc etc.

    Other issue is that, as and when something bad happens in this part of the world and/or things pick up somewhere else… the currency outflows could be dramatic.

      • If you’re using gold as a hedge against an expected depreciation of the $AU against $US, you must be confused Why not buy $US directly?

        Putting aside your confusion about using gold as a hedge, gold has already appreciated about 30% over the past two years. It’s not going to appreciate much more in the short-medium term.

      • Because the yield differential could be wiped out in two days in these markets?

        All you need is the spec element running with the dumb money central bankers to be spooked.

        • No argument. But of all the AAA rated sovs the Aus10Yr is winner RFN and many central banks and pension funds hedge and hunt AAA.

          Cut Australia to AA (property crash?) and NZ is a higher yield.

  2. “The McKibbin proposal needs a national debate. Right now we are the new Switzerland and need policies to cope with it.”

    +1 with many appended zeros.

    Thank you to all at MB for pressing on this critical issue.

  3. HnH,

    If, as you say, “The Aussie still falls when a big risk event strikes”, doesn’t this feature provide the shock absorber when it is needed most?…making the McKibben plan redundant?

    • No, because the slow painful death of our non-mining trade-exposed sectors means the AUD shock absorber won’t work. You can only have a bounce back if there’s something left to bounce.

      If there’s a Big Risk Event the RBA can stop printing AUDs immediately.

      • “the slow painful death of our non-mining trade-exposed sectors”

        That statement caused me to look at the ABS data on “Trade in Goods and Services.” I examined the seasonally adjusted series and calculated growth/decline for the year to June 2012.

        I’m pretty sure that rural goods count as ‘non-mining trade-exposed.’

        Exports of rural goods (sa) +8.3%

        What about manufacturing, surely that counts as ‘non-mining trade-exposed’, right?

        Exports of machinery +7.1%
        Exports of transport equipment +1.4%
        Exports of other manufactures +1.1%
        Exports of other non-rural +18.7%

        Would services also count as non-mining trade-exposed?

        Exports of services +2.8%

        And what of the evil mining sector?

        Exports of metal ores and minerals -4.7%
        Exports of coal, coke, etc -18%
        Exports of other mineral fuels +9.4%
        Exports of metals -6.3%

        • Cherry.

          Clearly the economic story of the past few years has been a contraction in mining exports, and expansion of manufactured exports.

          • “Cherry pick”

            Not at all. I simply looked at the lastest available data from the ABS based on the categories they supplied. The data clearly show that exports from the non-mining sector are not falling, indeed actually rising. Moreover, mining sector exports are falling.

            I must admit, the results surprised me, but hey, facts are facts.

            It appears, therefore, that the so-called Dutch Disease is coming to an end, if it hasn’t already ended.

  4. Australia is the new Switzerland? Switzerland is the old Australia more like it. Our currency has been more overvalued for longer, its just that the Swiss were smart enough to do something about it and save their industries.

    • Switzerland well why not,
      Has anyone else flirted with the idea of building a large hadron collider consisting of several esteemed australian economists kebab shutes?

    • At least the Swiss have reasons to be overvalued, they enjoy a 20 billion trade surplus with China, own the worlds largest food manufacturer, commodity trader and 3rd largest resource company.

  5. A thought from Charles Hugh Smith, “.. there is very little history that informs the confluence of crises we now face; the more replacement policies diverge from the mainstream, the more unpredictable their consequences become. As the saying has it, the road to Hell is paved with good intentions, and policy choices that seem common-sense in crisis could issue disastrous results.”

  6. GunnamattaMEMBER

    Basically Minack is on the money. But I think there is another effect that isnt quite getting a mention and that is the rigidity (as opposed to flexibility) all those central banks buying into the AUD add to it.

    Go back a few years and whenever something happened (CAD worsened or got better or consumer data waxed and waned) the AUD performed Keatings ‘shock absorber’ role and tended to move real quick over a big range. With all those Central Banks on the wagon it will be a lot more sticky.

    To me that tends to mean that when companies decide to bail from Oz (or doing things in Oz) on the basis of the currency they will be reading ‘stronger for longer’ – and that sectors outside mining will be ground that additional bit into global uncompetitiveness as regards price.

      • The central banks are almost certainly only a part of the problem.

        Markets are full of sheep. AUD is more traded in London than GBP.

        Every bank FX trader and his dog is front running central bank orders, while day traders and hedge funds are running along with the trend.

        A Tobin tax and RBA intervention would hit that part and add a lot more uncertainty to a market running well ahead of itself, as Minack points out.

        This has all the makings of a bubble about it if nothing is done.

        Have a look at ZAR graphs from 2000 to 2001. From USD7.00 to USD13,5 in a few months, back to USD5.00 within two years, but a lot of people got badly hurt.

        • But isn’t the issue that the Tobin tax would have to be applied universally? I’m not 100% sure on how the FX markets work, but as I understand it the London traders would easily escape a Tobin tax imposed from Australia, even if they’re trading AUD.

          But aside from that, the traders working at the margins might move the rate a few pips – the bulk orders from the central banks is almost sure to move it more significantly. Wouldn’t McKibbin’s plan work by simply increasing supply directly the the central banks and bypassing the market?

          • Nope that is not true at all.

            As with all currencies they have to settle in the ‘home country” banking system.

            Every AUD trade is booked through Aus bank “nostro” accounts where the tax could easy be levied on the counterparty banks who would then pass it onto their customers.
            There could be an offset rebate for trade related transactions.

            Offshore banks could try and run an offshore CFD type market but would have to assume all risk which would be heavily skewed in this case, and the minute they tried to offset that in normal AUD trade they would be hit with the tax on the full amount that they are hedging as it passe dthrough the Reserve settlement system.

          • Hit submit button early.

            I agree with McKibbin’s plan, it would take the sting out of the spec interest big time.

            At the moment it is a one-way bet, and the further it runs the more natural sellers hold back.

            the RBA does already do some low key intervention, not sure on what basis, but that doubled last month to about $700-$800 million, can’t remember exactly.

  7. The Little Aussie Battler is a star on the other side of the world.


    Minack, McKibbin and RBA all rate a mention on ft, as they do with Ticky.
    Interesting McKibbin in The Business interview appears to backaway from his call for overt RBA intervention warning it would create dangerous expectations.

    Padley repeats his “forget the last 30yrs of debt fuelled growth” warning with Ticky

  8. Great debate. I’m surprised the Swiss have taken the path they have – imagine how much wealthier the already well heeled Swiss based capital would have become.

    Sure there is a bit of IP industry there now, but that was mainly loose global investments chasing a tax fav location.

    All very surreal. Hard to believe we couldn’t find a way to use this demand for AUD to fund RnD and education.

    (as an early adopter of the total price-setting failure of equity markets perspective i might add… Go you good aud)