I was struck by this chart from Merrill Lynch this moring. Clearly the Australian dollar has not only decoupled from the economy and commodity cycle, it has also gone its own way versus the other commodity currencies, and how!
As an experiment, here are the key metrics of each of these commodity exporters. First, interest rates:
Yes, that’s right, all have substantially higher interest rates than Australia. How about fiscal stability?
Certainly Brazil looks challenged but the others are solid. Now growth:
Again Brazil is struggling but the others look good. And current account deficits:
No bogies here.
In sum, there’s a mix of course, with Brazil especially looking challenged but both South Africa and Indonesia are travelling well and given the very big arbitrage available in interest rates differentials, you have to ask yourself why the Australian dollar is still the global markets darling. Have investors become so fixated upon return of their capital (versus on) that they no longer consider yield at all?
Or is it just this, the sovereign rating?
- Australia: AAA stable
- Indonesia BBB- stable
- Brazil BBB stable
- South Africa BBB+ stable
Of course there is more to the story than this. Developed market status, stable institutions, sovereign risks, mix of commodities etc. But it does rather look to me like Brazil is where it should be, South Africa is getting a splendid run, Indonesia is over-achieving slightly and Australia is getting a raw deal.
But don’t worry, markets exist for the sole purpose of closing such gaps…eventually.
