Yes, Mr Kohler, rates and the dollar will fall

Alan Kohler reacts to the latest US figures today at Dad’s Army :

What if, just as the Federal Reserve is getting ready to start raising interest rates, the US economy starts weakening so that the rates ‘lift off’ is postponed and the US dollar rally gets called off?

That would not be good, since the Australian economy is hanging out for more currency devaluation. The 20 per cent or so in six months has not been enough.

…If the US dollar starts falling, the RBA will be powerless to stop the Aussie rising. It can (and will) cut rates on Tuesday, but it won’t be enough. The cash rate would have to be cut to 1 per cent to make a difference.

Old news. The US dollar rise and oil shock was always going to delay the Fed. The RBA is not powerless of course and rates will be cut to 1%, though sadly only slowly because it refuses to innovate its policy toolkit with strident macroprudential.

As a result, the Australian dollar will continue to devalue overly slowly versus the needs of the economy, paced against the RBA’s ham-fisted management of the tension between the economic weakness emanating from the mining bust and its housing bubble.

As for today, UBS says it nicely via Forexlive:

The surge in commodity prices before and after the Global Financial Crisis sparked a boom in Australian mining investment. New ore bodies were explored, new mines opened, rail networks were expanded, port capacity was upgraded, and all this served to significantly boost Australia’s export capacity. The fruits of this investment are clearly visible now.

Crucially, this supply uplift has been a key contributor to weaker prices for iron ore and coal – Australia’s two biggest exports. These steep price declines mean the legacy of Australia’s mining investment boom is a trade balance still in deficit territory and a terms of trade now at multi-year lows

Worse still, the boom has matured and is now in sharp retreat. One need only recall the dismal 2015/16 ABS capex intentions survey to be reminded of the considerable headwinds facing the Australian economy – and hence the currency. What really stood out was not the (steep but widely expected) 20% y/y drop in mining; rather, the real kicker was the sharp erosion in non-mining intentions to a 9% fall.

Barring a sudden improvement, total (nominal) business capex next fiscal year threatens to contract for the third consecutive year – the first time on record in at least 50 years.

Based on current plans, our economists reckon that declining investment across all sectors (but primarily from miners) could subtract up to 1.75pp from GDP in the next fiscal year, condemning the economy to another year of sub-trend growth.

Under a number of scenarios ranging from ‘optimistic’ (using 24-year average realisation ratios), the UBS base case (5-year average realisation ratios), or the ‘worst case’ (a cycle low realisation ratio), we still envision a deepening drag on growth from capex into 2015/16 of anywhere between -7% to -23% y/y

…That’s a good reason to expect another RBA rate cut in April. Those not convinced will point to the conspicuous absence of any references to the capex survey in the RBA’s March meeting press statement. However, the minutes of that same meeting openly conceded that the capex survey implied “further large falls in mining investment, as current projects were completed and few new projects were likely to proceed” and “non-mining investment would remain subdued for some time yet and for longer than had been previously expected”. This alone portends another downgrade to the RBA’s GDP forecasts in their May SOMP.

…To help cushion the blow, the RBA has made no secret of its preference for a lower currency, which “would help achieve balanced growth in the economy”. Granted, the market has already priced in a larger than 50% probability of a 25bp rate cut this month. However, any AUD relief bounce on a ‘no change’ verdict next week would simply tee up better levels to fade given the pricing in of further easing beyond that in the market.

This also explains why the Australian dollar has stopped benefitting much from occasional encouraging news flow or positive economic data out of China. Put simply, the mining investment boom is a once-in-a-generation event that has run its course. There is now ample existing capacity to cater to higher demand even if China does resort to another wave of steel-intensive investment.

That leaves Australian dollar bulls pinning their hopes on a revival in investment from the non-mining sectors of the domestic economy. But for that to happen, business confidence must first improve, and a precondition for this is a weaker AUD in our view. It’s not too late for graceful rebalancing to occur, but the currency will have to play its part in bringing this about.

It is far too late for a “graceful rebalancing”. That would have taken strategies three years ago aimed at lowering the dollar and containing house prices with the goal of improving competitiveness. Instead we’ve had three years of pump-priming house prices in the vain pursuit of “confidence”.

But that won’t stop the RBA from cutting today. It only has one lever and as the mining boom goes inexorably bust it will have to keep jerking it like a boozy granny slumped at her favourite RSL pokie.

Until it breaks.


  1. Wooo hooo! I’m looking forward to seeing even more borrowed money pumped into the only game in town! Reus will be pleased.

    Sydney house prices to infinity! Currency to the floor. And don’t look at the CAD; it’s going to get ugly.

    I can hear the misallocation of capital from across the Pacific.

  2. astrolinMEMBER

    Love the picture of the zombie poker machine player. Reminds me of the Reserve Bank, mindless pushing the interest rate reduction button while all the flashing lights and electro pokie sounds continue to stupefy. Keep that pressing the button in the hope of a win springing matters to life.

  3. I think I’ll take my savings and buy a property to let. The ‘Buy to Let’ answer to ultralow interest rates. That’s what we oldies boomers have to do. 🙁

    • Agreed.
      But in buying any asset, you should buy low and sell high…so you should still wait for the revert to mean.
      The trick there is the perceived safety of leaving your savings in the bank.
      I would be happy to receive zero interest rate in the bank when my savings are guaranteed… but they are not.
      In fact the guarantee for the big four banks is currently 5 cents in the dollar.
      This is a time when you have to seriously consider converting your savings into gold outside the banking system.
      Gold has the added attraction of increasing in value as your currency decreases in value.

      • I already have PMs. Can’t put everything into PMs … too risky.
        Can’t leave it in the bank, too risky…. Can’t keep it under the bed, too risky…

    • Exactly.

      Since we all like to make forecasts here, here is my forecast.

      As long as rates are going lower and staying lower, property won’t correct.

      All you fools who have been sold the lie that we can have lower interest rates and have property correct need to wake up.

      Rather than regurgitating what somebody else told you, make your own forecast. We’ll see who’s right.

      • AusDreamNoMore

        Property is correcting it keeps going up! this is the BoomersDream, I should change my username to suit as we all work to serve the wealthy boomers!

      • melbourneguy,

        You said,
        “As long as rates are going lower and staying lower, property won’t correct.

        All you fools who have been sold the lie that we can have lower interest rates and have property correct need to wake up.”

        Maybe, but I’m more of the view that the low interest rates have been used at the wrong time.
        Too late to drive the dollar down and give manufacturing and other exporters a chance.
        Too early as a salve against a truly sick economy.
        The bubble will run for a bit longer but the peeps are already tapped out, and it is only the opening of things like SMSF and whatnot that has kept the inflation going.
        I’m not too affected either way, but I think property will correct sooner rather than later.

      • You may well be right, in that if rates keep going lower, Oz property won’t correct (in nominal, AUD terms)…

        … but the AUD sure as hell will. I’m out of the country earning USD. If your property prices stay high, but the dollar drops another 30%, looks like a correction to me.

        Plus, at that time you’ll be saddled with rising tradable inflation, rising unemployment, and a CAD blowout. Those aren’t good signs for mantaining even nominal debt repayments with a falling dollar.

        So by all means, try and keep your housing bubble pumped in real terms. Your currency will be smashed, your national income will be smashed, your CAD will balloon, and capital will become increasingly scarce as it flees the country, leading to higher real rates in any case.

        Edit: on top, there will be an inflection point where the carry trade suddenly unwinds. When that happens, watch the real value of AUD denominated asseets fall over! The giant whooshing sound of money leaving Australia will be audible across the Pacific!

      • @lordDudley, “but the AUD sure as hell will”, spot on.
        It’s all connected to the AUD value and as you mentioned , CAD will balloon, national income will be smashed(already is) and people will start feeling that their wages don’t have the same buying power as before(inflation) and rates WILL have to go up. Timing is key but i don’t believe anyone has control over that but one thing is for sure, if the RBA keeps their current strategy, it will accelerate all the above

      • @paulF savers are used to this, very much so. The purchasing power of AUD$1 has been obliterated when the inflation comparison is land/housing. If/when reversion finally arrives the savers/prudent wealth effect will be phenomenal and the over-leveraged house-ATM types will feel what savers have for well over a decade. Good.

      • Dudley
        Very good summary!!!!!

        I’d also add the wildcard of Chinese Investment. As I’ve ranted before they have $2.4T (there or thereabouts) of, to them, useless US paper they are wanting to get rid of. I understand they do prefer Canada and the US as a destinations however it is a fair bet that a fair proportion of it is headed our way. So the A$ might not crash quite as far as some of us want but as it falls this property market (mines farms etc) is going to look cheap to Chinese investors. Extreme negative RAT IR’s and Chinese investment, I hate to say it, means property prices to the moon!

        The stupidity of the last 50 years is mind-boggling. However the stupidity of not learning a single damned thing after fifty yerars of this stupidity is even more stupid!

        The answers lie back in time.

      • @fl. I’m increasingly coming to your p.o.v on this. There is no appetite for change in Aust and the desire of our polity to prop up housing prices is huge, a massive blow-off in Australian property is entirely possible and probably even falling into likely.

        I keep thinking the mining unwind will impact, but this is naïve, we will only have to open the window a crack and this debt funding will be replaced in a micro-second by a torrent of global debt/money.

  4. Lower official interest rates today will worsen our world-beating debt fetish and do nothing for jobs or growth

  5. Michael Pascoe was on a short segment on Sunrise this morning talking about the possibility of a rate cut today. At the end, there was a brief exchange between Kochie and Edwina – the young presenter who often does the weather.

    Kochie: It’s what, 25 years since we had our last recession, so we’ve had a whole generation of Australians that haven’t known any economic hardship

    Eddie: Yeah, but ALL of my friends are struggling to buy homes at the moment

    Kochie: No no no, all your friends – okay let’s not start – all your friends have got to start – cut their lifestyle costs, and then they can afford to buy a home too…

    Eddie: Alright, alright, alright

    Kochie: Yeah yeah yeah

    Eddie: I promise I will

    That showed her Kochie!

    From about 3:35 here if you really want to hear it:

    • Thank goodness that cute little thing was politely “yeah yeah yeah” to the condescending Koch

    • She should have yelled out what that protester did at the kefuffle in Melbourne on the weekend.
      “I’ve just been pushed by a white man.”
      Or, more specifically, a White Anglo-Saxon Protestant Bourgeois Boomer
      Dave doesn’t like dissenters around his neck of the woods.

      • It’s a generalisation
        WASP – White Anglo Saxon Protestant.*
        But in Aus and Brit they are/used to be the norm for figures of authority.
        If you are into racial profiling.

        *I am a WASP, probably bourgeois to some degree but I never really understood that one, not a boomer.

    • Wow. What a terrible guy kochie is. No compassion, empathy, or understanding. Just blind ignorance and faith that he’s right. Head in the sand when someone gives a first hand account of the real world.

    • It’s funny that wankers Koch’s age are always going on about gen x,y,z or whatever to save, yet they’re the most prolific spenders on crap and never saved a cent in their lives, just rode the asset wave.

  6. Riding on the bus on the slope heading for the cliff,
    A whiny voice from the rear asking: “Are we there yet?”