See the latest Australian dollar analysis here:
I normally stay out of politics. It is something I learned working in funds management and for the major banks for much of the last quarter century. Commenting on politics is not something that is looked highly upon. That is not to say that back in 2000 and 2001 when I was saying that the Aussie dollar was going under 50 cents that it didn’t stop some related to government to try to gag my calls. But that is the way of politics in this country – it only seems to run one way.
Barracking for one side of politics is not my style as I recognise that either government in power can only deal with the economy that faces it and that a large part of what they can achieve is related to what the independent central bank does and does not do.
But today I am going to comment on the Gillard government and its failure of vision about the impact of what they do and say in public regarding the Australian dollar.
Yesterday the Government admitted that there is a $12 billion hole in revenues. For a number of years MB has been warning about the state of the Australian economy, its imbalances and its underlying structural problems due to the reliance on, to coin a phrase, House and Holes. We have argued that the unmitigated high Aussie dollar is a boon to consumers but not to the fabric of the Australian economy in the long run.
But the Australian Government has been more interested in playing the political game and has consistently said that everything is rosy, has consistently forecast surplus after surplus, has forecast huge mining revenues, big company receipts and a strong economy. Yet for more than a couple of years now they keep undershooting their targets on almost everything.
The impact of this is that the Australian dollar has been bid up by central banks and others around the world excited by the safe harbour that Australia has offered them in a world of economic turmoil.
It is not difficult to fathom how much semi-hot money is sitting in Aussie dollars taking shelter from the global storm and how much of that money might flow out once the thought hits them that the Australian Government’s Panglossian outlook for the economy and for interest rates might be a mirage. The picture above tells the story – foreigners held $32.6 billion in June 2007 when the GFC started and they held $213.4 as at the end of 2012. Then we have the billions of bank debt and sitting on Australian bank balance sheets to contend with.
It would be hysterical at this point to suggest that all of these bonds are going to hit the market and drive the Aussie dollar to 60 cents but it is worth thinking about what drove the Aussie higher and then think about what might drive it lower again.
The key drivers of the Aussie can be distilled into 5 core themes which are:
- global and Australian growth outlook
- interest rate differentials
- investor sentiment
- technicals
- the USD
Over the past few years, since 2009 when the Australian economy didn’t implode and the housing market didn’t crash the way many foreigners thought it might, the miracle Down Under has supported the Aussie dollar in a significant manner.
Investors have consistently told us that they like the Aussie because:
- Australia remains a strong economy compared to the rest of the world
- we are close to China and have a mining boom
- it has a big positive carry (interest rate pick up) relative to other developed markets
- rates look likely to stay put for a while
- the sovereign has a strong balance sheet with low debt and a healthy budget
- the US dollar has been largely under pressure
- the Aussie was in an up trend
- Australia has a free float with not much chance in intervention from the RBA
All of which combine to give us positive sentiment toward Australia and the Aussie dollar and all of which have been reinforced by the free money culture of the Fed and other central banks.
But with the Government now signalling that the economy is weaker than forecast, that revenues are under pressure, and that it is going to continue to spend on the big ticket items it has on its agenda, then it is going to have to cut back somewhere and thus even with a deficit risk a fiscal contraction at the household level at a time when Australian households continue to labour under too much debt even as the mining boom and mining investment boom is unwinding.
So the outlook for Australian growth and thus Australian interest rates is to the downside while the outlook for the Australian balance sheet is for a serious deterioration. Australia is likely to have to borrow more from the market and is likely to be in structural deficit for some time.
Keynes might be pleased by the Government’s plans but there is a growing chance that international investors thinking that Australia was different from the rest of the world recognise that perhaps we are just going to be impacted later than the rest of the world rather than not impacted.
Which means that a flight could be around the corner from the Australian dollar and it might be sooner than many think if this weekly chart is any guide.
We have a lifestyle short on the AUDUSD at the moment. I think that taking some cover is worthy of thought for traders and corporations alike.
- Macro Morning: Gold surges - August 26, 2013
- Macro Morning – Stocks and Aussie higher - August 23, 2013
- Macro Morning: Australia dollar down - August 22, 2013
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Cross-posted from The Conversation The
I hope that it does fall, but not by as much as 40 cents. You are not alone in your analysis.
http://www.cnbc.com/id/100683015
It has to fall, only the extent is debateable.
He already linked to that.
my bad, I didn’t notice the link.
Good piece!
I actually thought that Gambles comments actually didnt seem that extreme. I dont know about 18 months but would assume that when the exit door lights go on there will be some overshoot
Well put!
That was the bit that Gillard left out yesterday.
How are the deficits to be funded?
There seems to be an assumption that all the government bonds required to fund the deficits.
1. Can be sold to overseas investors and central banks
2. That this is a brilliant idea.
3. That the price to find a buyer will remain at rock bottom.
Presumably, if this looks shaky a plan will appear force super funds etc to buy what they otherwise do not appear to interested in buying – there may be a reason only foreigners are interested in the bonds at current prices.
The Government are giving us a little serve of honesty but there is a lot more to come.
the Gillard government and its failure of vision about the impact of what they do and say in public regarding the Australian dollar
Undoubtedly this has been the greatest failure of this government. They bought into the whole China-will-boom-forever story, but then so did the entire Canberra bureaucracy (RBA, Treasury, BREE etc) who presented it to the politicians as gospel truth. It would have taken a politician of great courage to implement a plan to prepare for a post-mining boom economy, when everyone around you was telling you the boom will run for another 20 years.
Not that I’m excusing them. There have been plenty of voices warning of trouble ahead for many years, first among them, our own Mr Holes. A good politician should have been asking what’s this Houses and Holes bloke on about, and is there any truth in what he’s saying.
Yeah but thats where the modern management, HR etc comes in.
The moment any good politician floats that question and gets a deviant answer then the said individual is identified as not being a ‘team player’ and put on ‘special projects’ for 9 months before being offered a voluntary redundancy (the traditional APS management tool)
Not sure about the entire Canberra bureaucracy Lorax, friends at the lower levels were quite open about the state of the economy. As with all large organisations, what start as a red light eventually turns green by the time it’s got to the top. A great deal of massaging goes on to make a shit sanga look like a gormet panini.
It would be hysterical at this point to suggest that all of these bonds are going to hit the market and drive the Aussie dollar to 60 cents
Yeah, but what’s interesting is that the international media has woken up to the possibility that the miracle currency might be vulnerable to a big correction.
I wouldnt so much say that they are thinking that it is vulnerable
I would say they have been aware for quite some time (or at least those I have any interaction with) that the miracle currency has finite limitations and that the average Australian, let alone average Australian decision maker, may not share the same views as say Dirty Harry about limitations awareness
Does the market listen to our government and place value on what it says? Really???
No – but part of the big buying has been been CB’s and other soveriegns who would have spoken to and been briefed by the Treasury who are singing off the Gov’s hymn book.
I should have been clearer because your point for the chartists is relevant but in the context of this discussion what they say has been really important in shaping fundamental beliefs and in doing so buying and thus price action.
So it flows through to the techs that way.
Cheers
Greg
Fair enough.
Your bearish outlook is medium/long term. I reckon it’s got a shot in the short term too, but only if the AUD/USD remains below 1.04:
http://www.avidchartist.com/2013/04/audusd-has-no-business-above-104-if-it.html
I so hope your right and the Aussie get back to 0.6, I would make a killing (my income is in $US) but this currency has a strong tendency to be stubbornly contrarian 😉
Well lucky you, that will be a bonus. You will also do well with your houses, they will bounce higher if the $AUD falls significantly.
You will also do well with your houses,
The question is peter whether the RBA will continue to push interest rates towards zero during either
1. An external currency crisis
2. Inflation in the region of 10% or more (20 to 30%?)and rising.
We better keep selling assets as fast as we can to whoever foreign interst will buy them. Let’s not be too fussy…Chinese Govt, Russian mafia…anyone will do.
whoever = whatever!
Yes there will be a significant adjustment to be made. I’m not sold on the currency crisis though. The banks debts are in $AUD (or hedged) but I have no information about the standing of our foreign currency debt. Do you have a link that will quantify that?
In a perfect world, that should be balanced against greater export revenues and expanding trade opportunities, tourist revenue etc. due to the low dollar, although I accept that we don’t live in a perfect world.
It’s not all one way though, there are positives and it’s too early to make predictions on the exact outcome.
As with any change there will be winners and losers.
Even if we are totally ‘hedged’ which I don’t quite ‘get’ but maybe that is my ignorance based on my own experience do you think we can just print the dollars in repayment?
We can’t and at the same time maintain a stable economic and social structure.
As to winners and losers for the last 50 years all but a few of us have been ‘winners’ based on cheap imports, unlimited credit and negative RAT rates. Experience suggests the wash-up will be mostly losers with very few winners.
I’m just trying to figure out how to be a winner and I don’t have a lot of faith in my ability to switch asset classes rapidly at just the right time.
What asset in which location fell dramatically when our dollar rose to the current high levels?
I’m thinking about that one!!!!!!
My only answer is manufacturing assets and perhaps assets associated therewith. I wouldn’t go near them for WHS and stupid Union domination reasons.
Everything else has gone up…even rural land while they have earned zilch!
Not rural or manufacturing. Took an absolute beating due to the high dollar. We can’t walk away from it, the infrastructure is in place.
If the dollar fell heavily it would be like turning on a tap as it again sold itself to both Australians and foreigners alike, it brings in foreign currency, and at the moment you can buy at about 50% off peak cost, or even better if you’re canny.
My best thought all along was Gold miners! However i didn’t bring them into present discussion because of timing…essentially as per HnH’s post today.
Tourism has taken a beating but Govt has nearly permanently wrecked it. I guess if you could get a different govt that could wind back some of the award stupidity it could make a come-back.
???
Surfers Paradise units.
IMHO tourism was ravaged by the dollar. Aussies travelled abroad because it was cheaper than a domestic holiday, and tourists found us too expensive.
All of that will reverse and visitor numbers to the GC will be like turning on a tap.
Rental incomes rise, restaurants fill, hotels fill, business as usual within 12 months.
All at a time when borrowing rates fall to about 5%.
What do you think will happen to GC property when returns rebound and rates are low?
“Australia is likely to have toborrow more from the market and is likely to be in structural deficit for some time.” And that is why the A$ is more likely to see 1.1000 before it goes anywhere else. Because to get that crucial borrowing in, the rates to attract it, given the last 48 hours worth of ‘news’, are not now lower…are they?
Not sure you are right on that – Aussie is starting to act like its old self…up when the market is ebullient and down when its not…
We’ll see – its a market overall and this is a medium/long term view like my gold one was.
Cheers
Greg
http://www.smh.com.au/business/graincorp-deal-stirs-agriinterest-20130429-2ioxb.html
While I am in general agreement I FEAR (KNOW)we may just try to keep the game going by underpinning the A$ with this sort of deal. Whether these asset sales will be enough would be a moot point.
It’s in the interests of everyone with any interest in the current game. Such interests include all Government at all levels, Banks, Real Estate Industry, major retail, restaurants, lawyers, Unions.
Is there anything else left in Australia? Pensioners et al? Well they won’t be real pleased either!
That said the $2.8B sale of Graincorp keeps us going for about four weeks. Note the ‘entrepreneurs’ looking to make a quick quid are busy searching for which business we will have to sell next month!
I got to tell you Flawse, I am a holder of a chunk in RIC and have connections at both Bega and WBC.
If they start to move on them then we are actually down into relatively small agriculture holdings and the suppliers and servicing functions for smaller farmers gripped by the nads (a’ la Graincorp, Viterra etc, look at the big buyers [speculators basically] of water rights). What do they selloff next? Tasmanian Salmon? Prime Agriculture? Roberts Industries? we are actually starting to get small scale. No wonder Coles and Woolworths find it so straightforward to cream the guys on the land, everything that services them or provides their supplies
I think what is happening with our agricultural sector (if I may sound like a red necked xenophobe for a moment) is a disgrace. Sure I believe in foreign investment, and dont have a problem with foreigners owning Australian agriculture. But selling off the one strong suite we have (or the value maximising bits of it) after mining is just weird.
I will go and cuddle up with my Bob Katter doll for a few hours and get over it….
Gunna
The Ag processing situation is scary.
The problem is we HAVE to sell Ag,mining and everything else to maintain our current lifestyles.
That story is NEVER told! (Well hardly ever 🙂 )
Neither journalists not politicians will get popular telling us the real truth.
As to Bob…sure he talks about Ag and Northern Development etc. However when it is all cocooned within the nice fairy story of lowering interest rates even more etc then he is just talking BS.
He DOESN’T want to hear about reality. A few friends and I already tried!
“I will go and cuddle up with my Bob Katter doll for a few hours and get over it….”
Don’t forget to give us all a turn – sharing is caring 🙂
Flawse!
Haven’t you read your text books?
In theory it doesn’t matter who owns the means of our production as they can’t take it with them and we can always ‘squeeze’ their assets with taxation etc (providing they don’t threaten us).
What the text books tell us is that we should sell all our assets including mineral resources as fast as possible and then take that money and make brilliant investments in higher yielding assets across the globe.
The fact few of our competitors don’t seem to read these text books (except the bits about convincing small countries to sell stuff to them) is beside the point.
And of course our boned headed business media simply wave as the ship drops over the horizon.
Grumble Grumble.
Correction
The fact ‘most’ of our competitors don’t seem to read these text books…..
‘Grumble Grumble.’
I’m afraid my ‘Grumble Grumble’ is becoming a bit too constant. It’s all so bloody depressing! The sheer inanity is mind boggling!
pfh
My text books are very old and tend to look at economics as dealing with efficient allocation of resources and its social implications taking a long term (greater than 10 years) view. They are totally impractical in today’s fairy story ‘we can just print our way out’ world.
Ray Stevens (Ahab the Arab fame )has just about the best summary of our current attitudes and situation that I’ve seen!
http://www.youtube.com/watch?v=J6TcpfBHlbs
P.S. Before we start squeezing the foreigne’s assets we need to find one hell of a lot of money for Tanks and Fighters.
Crikey I better get cracking on that Europe trip soon!
AUD will be 1.10 soon. Buy up!
worktime
Should you have a sarc button or do you have a reason for saying that?
Some technical analysts have also pointed to a triangle pattern with the AUD. Would seem to be a strong pattern, if that’s your thing…
there is certainly that chance
we had a false break recently above 1.05 of the down trend line of the wedge which got me long but then the MM stops cut it out and now we are back at the other extreme
my view I guess is fundamentally based with a technical kicker
cheers
greg
Superb piece Greg. Nothing to add; you’ve nailed it.
You should comment on politics more often 😉