Bernanke demolishes Australian dollar

Thank you Ben Bernanke, down nearly 3% and into the 0.92’s in the blink of an eye:

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It’s a wall of red on the crosses too:

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And let’s recall yesterday’s DFM dollar post:

As recently as April this year, the Aussie was trading at around 1.0550 before the recent fall took it to a low of 0.9433. That’s a big fall of almost 11??%.

How low can it go? The NAB recently suggested the AUD could fall to 87 US cents by December 2014. But let’s remember that for all the extreme recent calls about the crash in the Aussie and the impending doom facing it, the reality is that it is simply back at the bottom of what might be considered a wide 10-15 cent range it has been in since breaking up through 94 cents in mid-2010. In context, this sell-off is not all that shocking and the forecasters of doom forget this.

A fall below 94 cents would signal a different and lower scenario. Our assessment is that this is likely, especially if the economy weakens due to the withdrawal of mining investment, assuming consumption doesn’t fill the gap. That may necessitate rate cuts to 2% or just below.

Despite the recent highs, the Aussie dollar’s average remains steadfastly around 75 cents. It may not revert to the mean but after 22 years without a recession, you wouldn’t want to bet on it.

So, what might happen if Australia did have a recession?

The answer was offered during the GFC low when global investors believed that was about to happen. Back then, it fell to 0.5960. There’s your answer.

I’m very happy to concede that while this continues, rate cuts are back on the shelf.

Comments

  1. Sitting here in Oregon watching this and loving it! About to crash through to 92c…

    Timmmmmmberrrrrr!!!!!!!

  2. Somebody on here a few weeks ago said the AUD to .90 by the end of the month and it looks like they might just have hit the hammer on the nail…….

  3. GunnamattaMEMBER

    ‘I’m very happy to concede that while this continues, rate cuts are back on the shelf.’

    The question for mine is if the RBA will be as backward in ‘leaning into’ the AUD coming down, as they were going up.

    I reckon they would be very close to actively intervening……

  4. The fall in the A$ will be highly inflationary just look at petrol prices this morning at $1.60 a litre. Over the past few years many companies have moved their manufacturing offshore so a A$ devaluation of 15% will result in increases in imported goods and services.

    Interest rates are probably at the bottom now , more likely flat till the election. Interest rates heading up next year and a rebound in the A$?

      • Over the past few years many companies have moved their manufacturing offshore so a A$ devaluation of 15% will result in increases in imported goods and services.

        Well duh. That’s what happens when you believe our terms-of-trade will stay in stratosphere for decades and allow the currency to sit at ridiculously high levels for years on end. Businesses give up doing anything in Australia and offshore everything.

        The Canberra elites allowed this to happen and now we will all pay the consequences. Paying $1.60/L for petrol will be the least of your problems. Perhaps Australians will have to give up their love affair with imported SUVs and buy something more economical, more environmentally friendly, and God-forbid, built in Australia.

      • Only if the RBA is insane. They will “look through” this inflation…

        Yeah we’ll just ignore this growing cancer! It’s not very big yet.

        Mind you trying to stop inflation by making your currency rise is as about as stupid as stupid gets. It’s almost as stupid as thinking you have low inflation when it is just the result of the currency rising and inflation is actually running amok.

        Similarly lowering interest rates to stimulate consumption in already over-consuming debt ridden economy is a policy that is going to disappear up its own derriere.

        Welcome to stupid land.

      • I don’t say let it run. I say it’s a fiscal challenge. Or, at least a government one.

        Moreover, the risks are titled towards deflation as we go over the mining cliff and unemployment rises.

      • Considering the RBA’s active facilitation & encouragement of a decade+ of extreme house price inflation, they will almost certainly look through any future inflation once again.

      • surfbeach2536

        Inflation reduces the value of cash and deflation increases the cost of debt. Therefore since lower income earners have little savings inflation is more ethical than deflation

      • The Patrician

        “..risks are titled towards deflation..”

        Deflation? We are a hundred miles from deflation. We are not even experiencing low inflation.
        We are in the middle of the RBA preferred range and the immediate risks are inflationary.

      • Re inflation…if you don’t stop it dead you are letting it run. Tradable inflation leaks over into non-tradable the same as tradable deflation has been the main driver in keeping non-tradable relatively low.

        My opinion is of course that the whole of modern economic theory is a total FUBAR. So I’m not criticising the idea that monetary policy will not be very helpful. Frankly it’s all too late.

        What worries me is this fairy story we are creating. A bit of inflation, super low interest rates, a falling A$ and everything is sweet in the Austrlaian garden again.

        Can’t we really lay out the problems we really face and think through all the consequences just one time?

      • Don’t know about anyone else, but I’m not arguing we’re in Eden suddenly.

        the lower dollar is a precondition for averting disaster in my view. I don’t deny the inflation will have to be dealt with and will lower living standards.

        Just by less than a high dollar!

      • Don’t know about anyone else, but I’m not arguing we’re in Eden suddenly.

        No not Eden. What’s happening now is the inevitable consequence of the mining-boom-will-last-forever economic orthodoxy that has infected Canberra in recent years.

        Now that the tide is going out we’re waking up to the fact that we have little means to earn a living in the world, and an inflationary spike as the dollar retreats to where it should have been all along.

      • Deus Forex Machina

        With regard HnH comment on the Dollar…what is occurring is simply teh automatic stabiliser doing its jobs.

        It is why we have a free float it puts the volatility in the currency not in interest rates.

        So it’s fall certainly lessens the chances of massive interest rate cuts.

        Above 100 it restrained inflation at a time when the RBA policy was to let the Boom have its head all else be damned but the lack of downside follow through when the drivers started weakening has hurt the economy more than just the level itself.

        So now it is about the Aussie and the economy adjusting to a level that stabilises things.

        Time will tell

  5. In spite of the media, news of doom and gloom. My impression from customers is that outside of the mining industry, the rate of decline over the past 2 years has slowed and may even have bottomed. In particular, after 14 September should the opinion polls be right, some are expecting a boom.

    If the RBA is going to “look through” the inflation, it needs to either ignore or review its Charter?

    • The election won’t change anything in my view.

      China is still set to slow further.

      Iron ore is set to fall to $80.

      The Secretary of the Treasury has already loosened the RBA’s mandate and it includes employment anyway.

      While you’re right that things might improve a little in the next six months, the mining cliff looms into next year.

      Hiking into that would be bonkers.

      The key challenge for inflation in the next year is fiscal. The new government is going to have to prevent wage hikes.

    • Employment is also part of the RBA’s charter, so they will have to sacrifice a little inflation in the short term to maintain employment. To sacrifice jobs to keep inflation low would be a poor option IMHO.

      It’s probably higher fuel costs that will be the hardest for the average family to cope with.

      • Perhaps they’ll have to trade in the imported SUV. Boo hoo.

        Those SUVs we’ve been buying in ever-increasing numbers were only affordable because the strong dollar was keeping a lid on showroom prices and fuel costs.

        Now that Australia will have to live within its means “average families” will have buy something more economical, more environmentally friendly, and God-forbid, made in Australia.

      • Yep best to let inflation run and really make sure our whole society is destroyed.

        What are you blokes on?

      • Just a question…how many of you, who promote inflation as the answer to every damned thing, have lived through times of severe inflation and how many actually tried to run businesses during those times. Note that by a ‘business’I don’t mean owning houses or a running RE agency.
        I’m talking about something that employs people, makes or grows and sells goods?

      • Lorax you may recall that I don’t drive an SUV.

        flawse I’ve lived through times of high inflation and it does no one any good. But we won’t see mega inflation like we did in the seventies. That destroyed a lot of lives.

        My view is that the RBA might tolerate inflation of maybe 4% to 5% for a short term if necessary.

        Better that than 8% unemployment.

      • The idea that low inflation is somehow standing in the way of employment and the RBA should ‘look through’ inflation is bonkers.

        I can only assume that you are not talking about inflation but instead some one off adjustment – like introduction of the GST.

        If inflationary expectations do emerge they need to be treated seriously.

        Having said that,inflation is not much of a risk providing the government focuses on micro reforms that encourage people to employ themselves and others rather than calling on the RBA to try set off a new debt frenzy and asset price speculation using low interest rates.

        Like it or not – the start of the solution is accepting that defaltion in asset prices is unavoidable.

        People vulnerable to that – those with excessive debt – have had 5 years to get their house in order. How long do they want others to bail them out?

      • flawse: What’s worse a bit of inflation, or decimating the industrial capacity of your economy? Because we’ve been happily doing the latter for years, while enjoying the wonders of low inflation courtesy of the strong currency.

        Problem is, no-one thought to ask if this low inflation, low unemployment economic miracle was being delivered at a terrible cost. Now its becoming increasingly apparent it was.

      • Lorax
        The vast majority of people who buy SUVs have never even driven them on a dirt track. I bought a new Pajero back in 91 and immediately joined the 4 wheel drive owners club, Pom wanting to see the outback. Over the next 2 years they scared the [email protected]@t out of me while teaching me to drive it during weekends away. I had to return to the UK for a few years in 98. What did I find there? Herds of SUVs, no place to drive them.
        It’s about people’s need to protect themselves & their families (big is apparently safe and they can’t afford a truck) and they also feel they are more free – off-road capacity being very macho (even if you’ve no idea how to drive the vehicle).
        I’m now living in QLD, I own an old L/Cruiser and a new pint sized runabout, about the size of a lawn mower. The price of both of them is about ½ of what you’d pay for a Commodore, and you only drive the big old brute once in a while. Provided you can wear the rego costs and you’ve somewhere to park them this is the way to go if you don’t have a bunch of young children. In eco terms you’re still way ahead of the average punter in their enormous saloon queuing on the motorway, and you can go bush from time to time, there’s a lot to see outside of the Australia most Australians experience.

      • There is a misconception going around that we should be managing the exchange rate with lower interest rates – even though the last thing this country needs is to maintain or increase its credit growth.

        The fact that the $AUS is one of the 5 most traded currencies should be a major clue as to why our currency is too high. It has become a toy of international traders and speculators and central bank reserve strategies.

        Naturally the finance media think this a wonderful state of affairs as everything is just a trade to them

        Place restrictions on capital flows and in particular the sale of $AUS financial assets to foreign buyers and we can have an appropriate exchange rate and an interest rate policy that better reflects our existing excessive household debt levels and the need to deleverage (ie higher rates) so as to reduce the fragility of the household sector.

      • Lorax (The), may they ditch the SUV, chew some humble pie till they swallow it, and buy a 1.3ltr Yaris. It will do many people a world of good. Just a spoon full of sugar… OK I’ll stop.

        This is one of many blog/forum sites that speak of inflation as not being a problem, yet. Some other sites call it high. Does anyone look into how the braodcasted inflation rate (like the unemployment rate) is really determined. What is included, and what is not.

        Maybe for investors/speculators it is a different consideration. For many folk, the full bag (and some) of goodies they purched around 7 years ago for under $30 bucks, are the same people walking out of a supermarket with just over half a bag of goodies saying, $58 bucks! And yes! Their salaries did not increase.

        Grocery goodies are more expensive, petrol is more expensive, energy costs are more expensive and set to rise again. Yet, fidges, stoves, multi-media systems, humungus TVs, computers/notebooks,… are as cheap as chips (actually a bag of chips is a little shy of $4.50 a pack now).

        Does anyone know if household energy, petrol, and food are included, or low-weighted in the inflation rate calculation?

        Peter Fraser, you mentioned unemployment of 8% being terrible, I agree. If you look into how the broadcasted unemployment rate is determined, well, if your head doesn’t fall off, you don’t understand what you’re reading. It isn’t 5.x%, nowhere near it.

        Inflation 2.5%?

      • Peter 8% unemployment OR inflation? It’s not a damned choice! If you let inflation run for short term economic prospects you distort your economy. You totally destroy your export sectors. In anything other than short run you exacerbate unemployment….unless you believe that we can increase debt, including foreign debt, forever and to infinity without cost.

  6. Free_Market_Delusion

    I wouldn’t bet on the US recovery. Its not given and if it doesn’t happen I wonder if there will be return to the aussie. There is so many dynamical things happening at the moment I still think the overall trend will be down but there will be more volatility.

    US recovery I suspect will be an illusion.

    • I’m with you F_M_D. I don’t buy the US recovery either. A recovery would imply a return to average interest rates – that can’t happen without bankrupting half the country.

      They have dug themselves into a Japanese style financial hole. The money printing is permanent.

      • thomickersMEMBER

        the usa is still the best place to invest…when compared with every other place. 😛

  7. All, those of you arguing for inflation “being better than deflation” should appreciate something: It is contextual, and there are not rules, just guides.

    Synthetic inflation in an otherwise deflationary environment is Stagflationary.

    And Stagflation is the ultimate system destroyer, for it both erodes (and potentially destroys) the notion of marginal incentive (ie. the reason people go to work, start a business, etc); and, the value and very existence of capital (ie. savings, not debt created from nothing).

    Stagflation will destroy – or at least severely damage! – the very system itself, via the systemic transfer of wealth, power and opportunity, from those who do not have to those that do have; and from those who are not systemically privilaged to those that are.

    Hence, arguments for or against the ethics of deliberately choosing one course of action over another require explicit qualifications of an otherwise unspoken context, such as timeframe.

    My contention is that synthetic inflation in an otherwise deflationary environment is far less ethical in the medium to long term, as it necessitates the suspension of the status quo via systemic (and unjust) transfer, and ultimately is likely to significantly erode and even destroy the system itself (leaving a vaccuum…).

    My 2c

  8. The effect of depreciation is to reduce real incomes. It is therefore basically contractionary in the first round. For most households and businesses, many imported goods are non-discretionary items. So, from their standpoint depreciation acts just like a tax increase or a hike in interest rates and will tend to retard economic activity generally.

    The effects of a depreciation will only become generally inflationary to the extent that cost increases can be successfully passed on by businesses or wage losses be made up by claims for wages increases.

    Some firms and households will (always) be well-positioned to do this. But in an economy that is experiencing a decline in its terms of trade – where nominal income is falling because of external factors – in general firms and households will not be able to recoup all the income losses caused by depreciation.

    The last time there was a pronounced and extended depreciation was during the Hawke era, when real wages experienced a prolonged fall, offset in part by other “Accord” based improvements to the “social wage.”

    This time, we are going to see a pronounced and extended depreciation that will produce an even greater reduction in real wages without any offsetting adjustments to the “social wage”. In fact, it is possible an LNP Government will also cut “social wages” – moves that would only compound the effect of depreciation on household incomes.

    It is most unlikely depreciation will trigger generalised inflation. The general level of private demand, the limits on the fiscal position, the level of private sector debts, the characteristics of the labour market and the liberal exchange rate mechanism all preclude this.

    We are just going to see relentless cuts in real incomes until the economy becomes competitive again, incomes of exporters pick up and private sector investment resumes.

    The real threat from depreciation is not generalized inflation: it is the risk it poses to labour demand and to unemployment and, considering the high private debt levels in the economy, to credit and housing.

    • Magnus Carlsen

      MB should be giving this guy/gal a regular spot.

      Plus phf007, and maybe we can have 3d1k and Lorax maul each other in a public online cage fight to the death. Please.

      I’ll take whatever odds are going that Lorax will rip 2d’s throat out within the 1st round…

      • I’d back 3D1K. The constant state of rage that 3D1K puts him in would end up exhausting him. 3D1K doesn’t seem to get as worked up, he’d just block and parry in a calm manner. In fact I imagine that he’d enjoy the game.