Mrs Watanabe abandons Australian dollar

Bloomberg is carrying an encouraging story on the release today of Japanese capital flows data:

Japanese portfolio investors reduced Australian-dollar bond holdings by 439.3b yen in January, Ministry of Finance data show.

This is the third straight month and the longest such stretch since six-month stretch ended July 2007. The data eludes me but there are other signs that the Australian dollar has had its day. Here are a couple of charts from a UBS report last night showing a showing of interest in bonds and FX portfolio diversification (“other being AUD”):

And Morgan Stanley today hijacks my own argument, that Chinese rebalancing is hitting the dollar:

…while AUD is sensitive to the overall performance of the Chinese economy, especially via its demand for commodities, there also appears to be a close link via the performance of the housing sector…the most significant AUD reaction to negative surprises coming from China recently has been to the sharp decline in the property sector. This is consistent with our analysis, which has found that developments in the Chinese housing market have been a good leading indicator for AUD over the past few years.

Using the relative performance of the Chinese housing sector against the broader equity market as a proxy for developments in the Chinese housing market, we have found that this indicator has a tendency to lead the performance of AUD by around a month (see Exhibit 3).

It’ll take time, but the dream (nightmare) for the battler  is coming to an end in my view.


      • But any real weakness, now, will do the work lowering the A$ without the need to resort to lower interest rates? I genuinely believe that the capacity of lower % rates to revive our economies has passed.Unless the Mrs Watanabes etc keep their faith in our economies, then what’s left to attract their life-support investment? Certainly not our cutting-edge manufacturing base! So all that will be left will be monetary policy to stop a melt-down in the currency. Lower = good; melt-down = not so good! And that will mean raising % rates to cushion the fall. Deep in the second half? More than likely.

      • GunnamattaMEMBER

        Now wouldnt that be a thought…….

        Higher interest rates to cushion fall of crashing AUD deep in 2nd half (or later 2014 I would have thought). Just in time to catch a load of real estate specuvestors coming to terms with a rise in unemployment stemming from the hitherto uber powerful high AUD.

        I thought there was just a whiff of skittishness about the AUD earlier this week

      • This is not fanciful is one of the reasons I don;t think they want to intervene.

        If we’re hit by weakness and the dollar falls, tradable inflation soars. You ether throw out the charter or raise rates and embrace a severe recession.

      • GunnamattaMEMBER

        I’m not saying it is fanciful. In fact I have loads of dough stashed in other currencies largely on the expectation it will happen.

        I dont think there is any if about it. We will be hit by weakness and the AUD will slump – probably significantly.

        And I tend to the view that the coming election is essentially about whether we toss out the charter (monetary orthodoxy) or embrace a recession.

        But I also think it is too late to toss out the playbook in order to avoid a recession, it is ultimately about minimising the pain,

        ….when the refusal to toss out the playbook over the last year in particular, has largely been about minimising pain for real estate types, and (as I, you and quite a few others here have argued one way or another) effectively prioritizing their pain and treating it, above that which will unfold at some point down the track, and is likely to be quite severe.

      • If the dollar falls, inflation won’t necessarily result. CPI is a basket of goods where substitution is possible (and regularly happens). If the price of imported inputs goes up, and as a result the price of finished goods goes up, the population will substitute away from highly priced finished goods (where possible).

      • GunnamattaMEMBER

        I might buy part of that Greco,

        But I think that a large part of the economy has been doing it tough for a long time already, and that a fair bit of substitution is already in – and we are still running spectacular Current Account Deficits, with nothing overly lumpy in the imports – all consumer stuff..

      • The most important factor for inflation due to falling AUD will be oil, as the rise in oil price will raise the costs of pretty much everything.

        Can oil also fall at the same time as AUD? Possible, but not likely. Then expect high inflation and high interest rates.

      • Prior to the currency war, I could predict fall of a commodity currency with the fall of commodity prices with greater confidence. Now, with the presence of massive central banks, I am not at all sure how it will unfold….

  1. Personally I believe Hot money flow will prop up the AUD for all of this year and well into 2014. unfortunately this is not good news because when the tide eventually changes there will be one heck of a reversal in hot money flow. It will be look-out-below time for the AUD, I guess you need to strap-in for a real roller coaster ride. but hey thats what you get when your export economy is just a one trick pony!

  2. I’m sorry, but if the AUD does depreciate inflation will occur in areas beyond oil. A large percentage of produce found within supermarkets is imported from outside countries.

    We are in incredibly interesting times. I believe 2013 will be the precipitate for a potential 2014-2015 demise.