RBA has indeed joined the global currency war and thank god for it

See the latest Australian dollar analysis here:

Macro Afternoon

Back in 2016, Australian economics titan, Tim Toohey, forecast a new Australian boom:

Goldman Sachs has upgraded its Australian dollar and economic growth forecasts.

“As we look out to 2017 and beyond, we believe Australia has moved through an important transition point and with it has emerged the prospect of stronger and less volatile real economic growth,” GS economist Tim Toohey says.

Mining to be a driver in the 2017 growth equation for Goldman Sachs.

He now expects 78, 77 and 75 US cents for the Australian dollar on a three, six and twelve-month horizon. He also expects GDP to average 2.8 per cent in 2017, 2.9 per cent in 2018, 3.0 per cent in 2019 and 3.3 per cent in 2020.

“A sharp turn in Australia’s national income dynamic now looks likely to move significantly higher following the spikes in coal and iron ore prices in the closing months of 2016,” the Toohey says.

While he expects bulk commodity prices to fall from current levels, Toohey says the recent surge has transformed his expectation for a modest rise in Australia’s terms of trade in 2017 to a material 8 per cent gain with most of the export price spike to be registered in late 2016 andearly 2017.

“This is likely to set off a chain of events through the Australian economy in coming months,” Toohey adds.

“The resulting surge in national income should be reflected via much stronger mining profits, a large taxation windfall for the Federal government and elimination of the threat of a sovereign downgrade, a restarting of idle capacity in the coal sector, a better climate for broader business investment and ultimately better employment and wage outcomes. It also sows the seeds for a more material handover of the economic growth baton to the private sector, and importantly this transition can proceed despite our forecast of a sharp decline in new dwelling investment in 2017-18. Perhaps the most dramatic transformation will come via Australia’s external accounts with a run of trade surpluses now in prospect for 2017 – indeed the combination stronger commodity prices and the ramp-up of LNG production suggests Australia will post the largest trade surpluses as a share of GDP during 2017 since any time since the early 1970s. Ultimately the state of the external accounts is the truth serum for the currency, and as such we acknowledge clear upside risk to the A$ from current levels.”

Toohey continues to forecast that the RBA will commence increasing interest rates in 1Q18, but says the skew is now towards an earlier kick-off in 2H17.

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As I said then:

Readers will know that I have a lot of time for Tim Toohey. But I cannot agree here. The bulk commodity surge has a kernel of truth to it but most of it is bubble and will reverse by mid next year with rebounding supply, plateauing Chinese demand, diminishing speculation and the USD headwind.

Moreover, although national income is going to get a nice boost, the channels that usually operate to spread it across the economy – mining dividends, Federal government tax take and rising wages via increased investment – are this time much more limited. Only the first is set to grow this time given the government will still be under pressure to rein unaltered deficits and there will be very little new investment in iron ore or coal. In fact, broader mining investment will keep on falling.

Given the dwelling boom will begin to roll over late next year, and vehicle assembly shuts as well, what part of the private sector is going to take up the “growth baton”? What is going to tighten up the soggy labour market and turn wage deflation?

The only thing is tradables and they’ll need a lower dollar and more rate cuts.

Then, late last year as COVID-19 bubbled away in China, Tim Toohey declared another new Australian boom:

“We’re going to see another 12 to 18 months of an upswing here,” he said.

“The financial markets have been obsessing about 2020 being the year of the global recession but that veil’s been lifted.”

“The rate of change in [quantitative easing] shows very clearly that there was a very dramatic revision, or dramatic withdrawal, of US dollar liquidity from the central banks from the early part of 2018 through to the very recent period,” he said.

As I said then:

I won’t say it isn’t possible. It is. There are three reasons to see an upswing ahead:

  • central bank liqudity;
  • easing trade tensions, and
  • rebounding US property driving global restocking.

The problem is that there are serious headwinds to each as well:

  • ECB, PBOC (and BOJ) liquidity rebounds are weak;
  • easing trade tensions rest on the very shaky assumption that a Hong Kong daisy cutter falling through a clear blue sky won’t land, and
  • global restocking will be inhibited by tarrifs.

Once we factor in these VERY obvious risks then Tim Toohey’s statement that “the worst of the cycle is behind us, the stimulus that’s in place is important, data is improving” becomes nothing more than a large leap of faith.

Yes, if geopolitics calms down then growth will improve. IF. Tim Toohey clearly has no special insight into that, except to ignore it, which rather suggests the opposite.

Today at the AFR, Tim Toohey is wrong again:

“Governor Lowe directly linked targeting relative long-dated bond yields, relative size of quantitative QE programs between countries and the exchange rate.

…”In the context of the history of Australian monetary policy, that is quite a big deal.”

“Perhaps I’m old-fashioned, but different financial prices for sovereign bonds tend to be associated with different views on the relative fundamental outlook for that economy, even in the presence of QE,” Mr Toohey said.

“A slightly more optimistic view on Australia’s economic prospects can easily be made vis-à-vis the rest of the G7 currently, and it’s hardly surprising that Australian 10-year yields would be slightly higher.

“Trying to design a policy framework to align 10-year yields relative to other countries looks cumbersome. It is debatable what real economic benefit this is really providing.”

It’s not old fashioned, Tim, it’s dated. Why? Five reasons.

First, the RBA is not benchmarked versus other countries. Its goals are Australian jobs and inflation. It failed on this for an entire cycle, thanks to exactly the kind of dated thinking represented in this article.

Second, a lower Aussie dollar provides an enormous stimulatory boost. It lifts commodity revenue and federal taxes, forces more local spending, lifts competitiveness, exports, imports-competers, jobs and inflation. That’s 40% of the economy given a rev-up. What’s not love for the central bank?

Third, a lower Australian dollar helps restructure the economy away from the demand drivers of domestic credit demand and towards tradables helping to offset the rather obvious and rapidly growing geopolitical gale that is Chinese decoupling.

Fourth, Australian growth prospects are not better than elsewhere. They are worse as we hit peak household credit, population bust, a staggeringly deflationary budget and Chinese decoupling all at once.

Fifth, the major reason we had a steeper yield curve is we were the only one not targeting the long end of the bond curve with QE, nor doing enough of it per se:

The RBA has indeed joined the global currency war and thank god for it.

Houses and Holes
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Comments

  1. happy valleyMEMBER

    Phil and the rest of the RBA happy clappies mixing it with the big boys. Wonder how long before a big boy treads on the Strayan flea?

    • Gonna stamp out your fire
      He can change your desire
      Don’t you know that he can make
      You forget you’re a man
      You’re a man. He’s a man.

      He’s gonna step on you again.
      He’s gonna step on you again.
      He’s gonna step on you again.
      He’s gonna step on you again.

  2. Arthur Schopenhauer

    Forces more local spending? If we don’t make anything, what local business benefits? Tourism, yes. Manufactured goods, no. Food, no.
    In contrast, I reckon it promotes more digital consumption (with most profits shared between offshore widget makers and software providers), and an inflated secondhand market.

    • Jumping jack flash

      This.

      The problem we have is that our economy doesn’t retain money. We create the debt and spend it. It swirls around our services economy before heading out over the ocean to stop at a country that actually makes the things we buy.

      Oh yes, those countries then buy our resources, so some of it does end up coming back through for another wild ride through the Australian services economy rollercoaster, but its not a very robust kind of thing. You wouldn’t hang your hat on it if the proverbial hits the fan.

  3. pfh007.comMEMBER

    The best thing about a lower AUD in manufacturing free Australia is that our assets are now even cheaper for foreigners to buy.

    Scott Morrison and his merry men should be able to set themselves up nicely by facilitating the sale of land, infrastructure and industry to foreign buddies.

    I am sure Tony Abbott will be keen to lend a hand.

    Thank goodness that commodity prices in AUD will rise.

    Hopefully they will keep pace with rises in the prices of the goodies we like to buy and cannot now produce.

    What China is going to stiff us on our commodity exports? Say it isn’t so.

    • Seems our politicians and corporations aren’t going to protect Australian-owned assets; if individuals don’t buy them and buy overseas assets, we’ll end up serfs in our own country…crikey…

    • happy valleyMEMBER

      Yeah, maybe Abbott can his beloved poms to buy a few baubles, instead of it always being chin-ahmen?

    • Jumping jack flash

      A good point.
      Its all about the debt transfer from seller to buyer, and how much the pile grows each time.

      Will foreigners relieve us from our debt burdens with their money/debt? Maybe, if our piles aren’t that large by comparison, and they can also obtain the right sized pile of debt they need to do it.

  4. Surely if a lower AUD does all these things, the RBA should be aiming to drive it down to 0.50 … or perhaps 0.30. Presumably then we’d all be stinking rich?

    Giddy up, fellas, let’s get this party started!

    • pfh007.comMEMBER

      Yes, it is absolutely amazing how you can get rich by driving down the value of your currency.

      Once you understand the concept the real smarties break the windows in their house so the wealth can fly in like a sea dragon.

      A baseball bat to every panel on your Porsche will really pull the glances at the boat club as you board your sunken yacht.

      The mercantalists who manipulate their currencies for strategic advantage must be having a bit of a Laff.

      • Jumping jack flash

        This.
        Its almost as good as trying to get rich using your own debt.

        (When its someone else’s debt though, you’re laughing all the way to the bank, of course)

  5. The debt is deflationary now that most of us are in a debt trap…..see Mr Hunt for details. MMT style schemes will fail for the same reasons, you have to issue currency not dependent on debt, even zero coupon perpetual debt.

    https://hoisingtonmgt.com/pdf/HIM2020Q3NP.pdf

    No systemic inflation until central bank liabilities are available to all unless we cancel the debt ( this is viewed as sacrilege so won’t happen ) There are a few steps between now and then and I expect the first one to be central banks buying at Treasury auctions as finances dwindle.

    • That’s a good article. And you’re right – you have to issue currency, not debt. But that’s precisely what MMT proposes…so what’s your objection?

      • That is not how I read the book keeping side of the proposed MMT…..perhaps I didn’t understand it properly ? They can’t bring themselves to cut the knot and let our money run free.

      • Jumping jack flash

        They’ve been issuing debt instead of money for at least the past 20 years.
        That was the problem. Nobody wanted to issue real money because that was considered to be too inflationary. You can’t print, printing is bad, printing causes hyperinflation. Just ask Zimbabwe and Venezuela and Argentina, and all of them.

        Nothing wrong with debt, though.
        At least on paper, because all the debt has to be repaid so it conveniently disappears, and everyone forgets about the interest because the banks forget to mention it.

        And then comes the interest rate manipulation, but that is brushed aside and explained away as being completely necessary for “jobs and growth” even though there is simply no way that could possibly happen, even during a pink fit on a blue moon, but nobody thinks twice about it.

    • Jumping jack flash

      This.

      Nonproductive debt is inherently deflationary and we have nonproductive debt in spades.
      2 trillion dollars of it just as outstanding mortgages. There would be a lot more than just this amount as well.

    • While I like Lacy Hunt and I think some of his his stuff is ‘on the money’, he is wrong on the deflation issue and the debt trap. Yes, private sector debt is an issue because it all needs to be paid back (or defaulted on) — both have the same effect i.e. it negatively impacts the money supply and is deflationary.

      However, money created and used by central banks is entirely different because they can expand their balance sheets infinitely, effectively making the money they print ‘permanent’. Look at what happened when they tried to shrink their balance sheet through 2019 — repo market melt-down in September which had the Fed hastily turning tail and boosting the balance sheet again. It was all so predictable. The Fed balance sheet is now $7 trillion and that money is now effectively permanent so the idea that money has to be printed without the debt is nonsense — it’s just a book-keeping entry after all.

  6. Thank goodness, here I was thinking I was at risk of being able to buy product from abroad without blatant aussie tax added.

    No matter how weak the currency goes, I still will never purchase from Harvey Norman.

    Anyway we are kidding ourselves if we think we can fight the big boys. AUD will float where they (US, UK, China etc), not us, places is.

    • Jumping jack flash

      Most of Harvey’s furniture is from Indonesia, and electronics from China.
      Can’t see how he wouldn’t put his prices up the required amount to maintain margin.

      It will still be cheaper to buy direct regardless.

  7. You do not need to intervene in the AUD mkt, you need to intervene in the foreign investors market, ie Stop foreigners owning Aussie assets
    The currency would find its true value when foreign can no longer recycle their AUD into farms, ports mines, real estate.

    Let them buy the Govt Bonds as many as they wish, just not hard assets.
    Unfortunately, the RBA is doing the opposite. Buying the bonds( QE ) from the foreigners to allow them to buy real assets.
    Crazy.
    If you have the lucky privilege of being able to print currency, why not buy something of value (eg SNB and equities ).
    RBA should print and buy gold and start using gold as a currency tool

    .

    • And gold is inherently deflationary … seems the whole issue revolves around productivity and resources with future income streams. Banks got into C/RE due to plaza and then went wild again because some philosophical legal breathing [rational buddy] and then certified [tm] by bad maths with a side of human tool user problem [VaR et al] and a tidal wave of derivatives.

    • Buying gold with printed money is extremely sensible, however, other Western countries would frown on it as the very act of doing so says:
      – I don’t trust the long term value of my own currency, and
      – I’m simply helping bring forward the day when the whole fiat thingy fails

      Russia has been recycling USDs into gold for 8yrs now. They will be in a very strong position when the USD inevitably fails. Good for them they have nukes. The Chinese have been hoarding gold and a few of the other former Soviet Republics have been doing the same.

      • I would take the punt that Australia is small enough to get away with it. Plus, it could be say it only buying Aussie mined gold, as a domestic affair. Bit like Japan buying Japanese ETFs. It is much bolder to buy foreign gold, or foreign equities like the Swiss national Bank does. They get away with it.
        And remember , this discussion is due to RBA stating that it wants the AUD lower, so will manipulate bonds prices to help achieve that.
        Print and buy gold achieves:-
        1. more currency in circulation- stimulative
        2. a store of a liquid international reserve asset
        3. May push gold price higher, good for tax revenue ( miners )
        4. Would make it harder for China to accumulate
        5. and Yes, bring the whole thing fwd whilst Amercia is still the dominant military force ( and is on our side )

    • commercial / real estate

      Gold is a commodity with no income streams or productive value e.g. would all that capital deployed be better allocated – ?????

      • Yes it could. But I am comparing buying bonds v buying Gold. Why on earth you waste the currency printing opportunity, which will not always be available to buy bonds, with have not income stream, not productive value and unlimited supply.
        The world accepts gold and always will.

        • Disagree with your historical views on gold because its not supported, never said anything about bonds becuase they are basically a hangover from the gold standard and less we forget Gov ended up setting the price on the stuff because of volatility and shortages when you least want it.

          Caveat family owns a few hundred thousand acres of geo with gold, copper, and precious stones, water and terrain is another matter.

          • The fact that it is not supported, may indeed mean that it is cheap, unlike Aussie housing as an example. or S&P

          • High prices in RE are location specific, equities have no claims and stock buy backs started as a response too Mungers LBOs … all the rest is various levels of control fraud with legacy costs punted over seas.

  8. I am not suggesting using gold as a currency. Simply if you wish to manipulate your currency around, use gold. China will always accept gold for goods. Not sure how many AUD bonds they will accept a few years down the track