More peripatetic drivel from Alan Kohler today:
…the net impact of China on the Australian currency is complicated.
If China’s economic growth matches the latest five-year plan target of 6.5 per cent, commodities will likely continue their recovery, since supply increases are either in the market or finished.
Aussie goes up.
That would have the secondary benefit for Australia of lifting the American inflation rate and making the Fed more comfortable to keep hiking interest rates, which would pump some air back into the US dollar.
Aussie goes down.
But if China’s debt load proves too much, and the economy collapses under its weight, as the head of the Peoples’ Bank of China, Zhou Xiaochuan, warned at a weekend meeting of global business leaders in Beijing, commodities will go into reverse (Aussie down) and so will US inflation (Aussie up).
The problem for the RBA is, and always has been, that given the mighty forces at work in the world, rate cuts here might not have much impact.
The good news is that this article is wrong on all fronts:
- first, Chinese GDP at 6.5% will not support commodities if it is driven by structural change that lowers the commodity intensity of growth. And that is the aim the 13th Five Year Plan. Chinese commodity consumption growth and absolute levels for iron ore and coal is very likely to continue falling;
- second, Kohler is mistaking cycle for structure. If the RBA were to lower Australia’s interest rate structure via policy tool innovation for the duration that the global currency war transpires then it would lower the trading band for the currency. Sure it would still get pushed around by the cyclical forces listed above but on average it would be lower as China continues to weigh on commodities thus aiding “rebalancing”;
- third, poorly researched insider journalism is no substitute for consistent and data-driven analysis and looks more like a fig leaf for bad policy than it does any form of genuine inquiry.
