Aussie, Aussie, Aussie, ouch, ouch, ouch

You’re all no doubt aware that the CPI has done this to the Australian dollar:

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But let me climb on board too!

Comments

      • It’s funny you should mention that because that’s the structural adjustment I’m talking about but adjusting to a higher AUD not a lower one.

        i.e. Structural change in response to a higher AUD which will make our industries more efficient.

        Adaptation is the best policy here, not RBA monetary intervention which just creates asset bubbles and misallocates capital.

      • The company are already lowering wages and every new contract contains a clause about working over time without being paid. NO PAY for overtime. Already this means people work longer for less, which has to translate in higher profits, is that right? This is the “adjustment” for professionals, mainly engineers. The labor (the tradies) is still working strictly from 8am to 3pm.

      • Capitalist you are being a bit selective.

        “….not RBA monetary intervention …”

        Agree with that in spades, but unless you impose some form of capital controls you are simply replacing RBA monetary intervention with Fed Reserve monetary intervention.

        Note – ‘some form of capital control’ not complete restriction on foreign capital investment in the land called Oz.

        I appreciate that this requires some judgment and subjectivity and a departure from a purist position – but we can work on that over time.

      • @Lori Does your company hedge its AUD exposure?

        @Pfh007 The exchange rate is adjusting to the Fed’s monetary policy and the RBA’s monetary policy. Right now, RBA rate cut predictions are being pushed out to next year while Fed QE tapering pedictions are also being pushed out to next year. The AUD and other currencies are reflecting that.

        Capital controls will create more problems than they solve, like all government controls. The price mechanism of exchange rates need to be free so that inflows are limited.

        What you are advocating is similar to what emerging markets have tried to do with a fixed exchange rates and that has ALWAYS ended in tears. Click here to see my post further down.

      • Capitalist,

        I agree with you that currency pegs are not a great idea but they are not the same (or similar) as managing capital flows by placing controls and limits on certain types of capital transactions.

        The main concern about capital controls is the one you will no doubt be quick to make, they prevent capital flowing from areas of abundance to areas of shortage etc etc.

        I appreciate that but take the view that the damage from capital flows driven by monetary manipulations are far more damaging to the fabric of an economy than things like mercantalist trade policy which is often of benefit – assuming we see no strategic need to make TV’s or T-Shirts.

        Whilst foreign Central Banks are frigging around with the price of money on a massive scale care needs to be taken to limit the damage those policies can cause.

        After all, we have our hands full with the monetary manipulations of our own central bank.

      • @Pfh007 I don’t believe any damage occurs to the Australian economy by foreign monetary policy.

        Devaluing the currency only drives up imported goods and while there may be a temporary boost to exports, it is negated by inflation of the money supply leading to higher prices in conjunction with higher import prices. There’s also the loss of investor confidence and sovereign risk.

        The problem with capital controls is that the government is picking winners and losers. I guarantee even if this policy option was available, they would boost capital flowing to housing investments. Remember the RBA and government are complicit in driving prices higher because they believe it will sustain growth in the future.

        They might allow more capital to the inefficient car industry or other politically connected lobby groups. This is exactly why I don’t want the government gaining more powers and especially the power to pick and choose which industries or sectors receive capital.

        I don’t trust the government with anything and neither should you.

      • I donโ€™t believe any damage occurs to the Australian economy by foreign monetary policy.

        Umm all the QE going on begs to differ.

        I donโ€™t trust the government with anything and neither should you.

        Indeed.

      • Capitalist,

        ‘. ……,,there may be a temporary boost to exports,……’

        Temporary is clearly a matter of degree.

        The QE policies of the US, UK, Japan etc don’t fit with my concept of temporary nor I suspect those companies (local accumulations of capital) that are no longer trading due to ‘temporary’ trading conditions.

        Sure when temporary proves to be temporary new flowers may bloom but that process is an unnecessary cost on our economy imposed by much larger competitors who can wear the impost more readily than we can.

        As for picking winners – requiring foreigners who want exposure to local residential real estate to do so directly or via RMBS ( non guaranteed) is a tilting of the table that I am comfortable with.

        But yes I don’t trust the pollies beyond some discrete and specific areas either.

      • @flyingfox would you rather have no appreciating exchange rate and see the housing market at record highs like in Hong Kong?

        @pfh007 UK, US and Japan have the almost impossible task of exiting their QE policies. Some doubt whether this is even possible without sending their economies into recession, as we saw with the Fed backing away from a 2013 taper.

        So yes it is temporary because normalising rates, reverses the gains made during the cheap money and currency debasement period. Take a look at what GBP/USD has done in the past 3 month as UK data continues to strengthen. Yes at some point they will be forced by the markets to normalise rates because either the currency loses value or asset bubbles emerge in property or the share market, which leads to instability in the future.

        If foreign investors want exposure to Australian real estate, owning RMBS doesn’t do that. RMBS are just bundled mortgages, they aren’t linked to the property market rising in value or rising rents.

        Capital controls will just reduce the investment pool available to businesses and increase their financing costs.

      • Capitalist,

        We are back at square 1.

        You say never trust a pollie.

        You say don’t intervene in markets.

        You acknowledge US, UK, Japan are doing it on a massive scale and may not stop and if they do no one knows when.

        But then conclude it does no harm and we should lie back and think of England rather than take any steps to limit the impact of those massive distorting policies on our economy.

        That is the problem with your purist position – it cannot cope with the short term or the ability of large players to do massive damage to small open economies that is costly to recover from assuming recovery happens at all.

    • Jumping jack flash

      +1

      soaring dollar no matter what we do, might as well slash the rates.

      Turn on the wealth taps. Everyone’s rich!

      • No no no! We need lower rates to really get things going. It’s all just starting. RE agents are certainly happy in Brisbane Sunshine Coast and Gold Coast however I doubt the flkow-through has yet been achieved to the BMW and Benz dealerships. We need lower rates to make sure the prosperity escalates and endures and reaches all those who have waited very patiently for the last year or so for this temporary lull in the rise in house prices to blow over.

    • I vividly recall the general air of high-minded opprobrium directed my way when, back in February 2012, I first began calling for a currency peg. Most unfashionable.

      EDIT: Really am losing all hope for the future of my SME now, after some 2 years struggling vainly to weather the “wonderful” high AUD storm. More fool me *shakes head*

      • It doesn’t matter much whether fixed/managed exchange rates are bad or not. There is NOTHING!!!! ABSOLUTELYBLOODYNOTHING more stupid idiotic moronic ignorant or treacherous than the current policy on capital flows and exchange rates. Nothing could be worse in any way!!!!

        I don’t know why everyone, apart from a few here present, is so thick about it. Nobody discusses it. Nobody dares mention it.

      • ” Nothing could be worse in any way!!!!”

        Of course those of us that understand the Science of Climate change will probably completely disagree with you. Particularly concerning the vexed issue of both private and public inaction on CO2e, leading to extremely serious consequences in the decades to come. The probable outcomes make capital flows comparatively trifling.

        Of course only on an Economics Forum could Science be routinely ignored ๐Ÿ™‚

    • After the spectacular blow-ups of fixed rate regimes in LATAM 1980s, Mexico 1994, Asia 1997, why would anyone want to fix or peg their currency?

      Hong Kong is another economy that is hurting from its peg to the USD.

      • Jumping jack flash

        +1 capitalist.

        The US doesn’t want anyone to peg to them, they are recently behaving like a dog shaking off its fleas. They will attempt to scare them off with “crisis” after “crisis” and exporting inflation to the rest of the world through never ending QE. Basically they are saying, remove the pegs, or suffer food riots.

        Their quest is to beat the globalisation game by becoming the lowest. You can’t do that while everyone, especially your major manufacturing competitor, is pegged to you.

    • Fixed v Floating v controls on capital flows.

      Controls on capital flows will affect the exchange rate without intervening to fix it.

      Sure the price you pay are higher interest rates but those cheap rates don’t come for free either.

      Plus if you want lower interest rates – the solution is simple, encourage people to save more. Or more accurately, stop discouraging them from saving.

      • “… those cheap rates donโ€™t come for free either.”

        Agree, they come with lower wages over time.

  1. I like the higher CPI. A higher dollar makes travel cheaper for me. It also discourages investment as a few people have noted that foreign property buyers have dived into our market due to the lower dollar.

    A higher CPI also makes it harder for the RBA to oppress young people like me by crushing our interest earnings and pumping house prices.

    I can only hope CPI continues to go up. It is the end game of this current ZIRP -> QE -> Outright Monetization strategy for returning to growth anyway.

    The way I see it, it’s the only positive piece of news for someone like me.

    • Exackery! Lets hit that $1.10 again, I’ve got some unfinished net based retail therapy. The currency gurus are all out this morning predicting no hope of us hitting parity again. By their record that means we’ll be there end of next week.

  2. +1 Phroneo

    Yeah, the high dollar kind of sucks.

    But it will discourage a rate cut.

    Also, as someone who’s not that great at analysing FX but just going from my gut feeling – how much is the dollar’s ‘knee-jerk’ reaction to the CPI and the level in general an overshoot? i.e. Yes, high CPI, delayed taper etc. etc. maybe but maybe the fundamentals still point to a lower level?

    • A higher $ just makes rate cuts more important, and with inflation so low, there’s clearly plenty of room to move.

      House prices in Sydney are just making up for slow growth in the past, and house prices elsewhere are ticking along nicely.

      Another Melbourne Cup rate cut?

  3. The AUD started moving 10mins before the 11:30am ‘high noon’ spike. It tipped it’s hand against economist concensus expectations (lower CPI) before the announcement. A little unusual to my eye – FWIW!

    Sooo, do we now have frontrunning cronies here too? Or maybe the market was jumping early, expecting something the economists weren’t….. those outside the Aussie fishbowl have had higher rate expectations for a while. https://twitter.com/JohnKicklighter/status/392806149012992000/photo/1