Washington Consensus and Dutch Disease – yesterday saw an interesting convergence of these two ideas which are vitally important to the debate, or lack thereof about the structure of the Australian economy and the changes being wrought by mining and the high Australian dollar. Briefly, the Washington Consensus was the set of “rules” which replaced
Australian Dollar Analysis, News and Forecasts
The Australian dollar, Aussie dollar (AUD) is one the world’s great commodity currencies. Founded in 1966 and floated in 1983 the Aussie “battler” is the 5th most traded currency in the world despite the economy being only the 12th largest by GDP.
The Australian dollar spent much of its first two decades post-float consistently devaluing from the pre-float value of $1.48 US dollars in 1974 to a low of 47 cent in 2001.
Subsequently it broke this huge downtrend with the rise of the Chinese economy and it’s insatiable demand for raw materials – especially those inputs into steel production, iron ore and coking coal – which Australian was endowed with in abundance. It topped this enormous turnaround in 2011 at $1.11 versus the US dollar.
As the super cycle entered decline so too did the Aussie, falling to a low of 68 cents in 2016 and still falling.
However, the Australian dollar had became popular as a small reserve currency holding with foreign central banks. As the value of the currency virtually halved during the bust they kept buying. Because global central banks were fighting both low inflation and oversupply worldwide, many engaged in an overt currency war, deliberately devaluing their currencies to capture or protect global market share of production. This was exacerbated by private sector flows pursuing the “chase for yield”.
This proved a challenge to Australian macroeconomic managers as the commodity bust persisted. Without the lower value, the Australian economy was unable to compete in non-resource sectors. The Reserve Bank of Australia embarked on a series of interest rate cuts, jawboning and, eventually macropudential policy, to bring the Australian dollar to fair value.
There are five drivers to the currency. Australia’s relative position vis-a-vis Chinese and its own growth; interest rate differentials, the strength or otherwise of the US dollar; the terms of trade and sentiment. Each of these tips into any fair value model but over time the primary driver is the terms of trade. The relative strength of each waxes and wanes with wider trends. For instance, during the “tech bubble” of the late nineties the Australian dollar was battered lower by poor sentiment as it was seen as a pre-tech dinosaur. After the “tech bust”, the currency rapidly recovered as sentiment turned favourable for real assets like commodities.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
The question I asked last week about Chinese growth and iron ore demand seems to have been answered for now. That question was the following: Not only has the market not priced a significant, if cyclical, China slowdown, if it comes, Chinese steel makers may very well enter an inventory cycle that liquidates some portion
I’m out of the office so I’ll keep this one brief but I just wanted to touch on the AUD/USD and the new highs it made above 1.03 overnight. Indeed as I write it is sitting at 1.0320 and looking like it wants to reach for the 1.0375 region that one of my colleagues thought
As readers know the AUD/USD exchange rate hit a new post float high of 1.0290 on Friday night and it seems that traders and investors just can’t get enough of what I used to call the “battler”. This non de plume was one that many of us in currency land used to call the Aussie
From Business Day this morning: A rocketing Australian dollar could hit close to $US1.05 next month, with signs its record-breaking run is far from over. The dollar hit a record $US1.0294, its highest since its 1983 float, in New York trading early on Saturday morning, Sydney time. A weakening US dollar, stronger commodity prices, particularly
Years of experience in financial markets has taught me never to crow to loudly on victories as Hubris is an always close stalker. But equally I’ve learnt not to despair to much if you get it wrong. That’s what stop losses are for. There are two sides to every trade and my selling sees someone
I haven’t blogged this week which I hope no one has thought was a result of the Aussie not falling as much as I hoped last week. Its simply been a case that I’m out of the office. Indeed I wanted it lower because in the .94/.95 region against the USD I thought it would
AUD/JPY and USD/JPY are up sharply at present on the back of comments from Japanese Finance minister that G7 countries will intervene to support the Dollar (sell Yen). There is also talk they will buy stocks which is what the HKMA did during the Asian crisis. The New York Times just sent a release out
Houses and Holes is right on the AUD we need to be careful what we wish for. We do not want to be a reserve currency – already we are seeing the strength of the AUD reallocating resources around the economy. HH’s post on Dutch disease a week or two back highlighted this and it
There’s more argument today that the Australian dollar is now a global safe haven currency, which, I must admit, agitates my innate cringe gene. Let’s see if there is any evidence. First, the following graph is the last six months of futures movements for traditional safe havens by percentage: The $US is green, Japanese yen is
As we blogged yesterday we finally saw a real risk off event which took the AUD with it. The generalised fear across the Asian region was tempered somewhat in northern Hemisphere trade and markets this morning seem a little calmer even if they are still on edge. I promised that if I saw moves or
Financial markets lack sentiment as shown by today’s price action. Japanese Prime Minister Nato Kan reignited the risk off rally today and send the Nikkei and AUD tumbling after discussing the rising fears of nuclear meltdown after a new fire at the Fukushima reactors. It is no understatement to say that this was the catalyst
Not surprisingly the markets in Japan are under pressure in the aftermath of the earthquake and the massive destruction. The Nikkei is down 5.14% as I write and USD/JPY has bounced off a low for the day of 80.60, no doubt on the back of some intervention from Japanese authorities. The moves in Japan and
Is the AUD weak or strong? It’s hard to tell because it seems to find support above .9950, like it did Friday night, but can’t get through 1.02. This tight trading range has been in force for about 6 weeks now and has the bulls and the bears excited in equal measure each camp expecting
Technical analysis is the study of patterns of movements in price action of a market or asset as a predictive tool for the future movement of those prices. Technical analysis recognises that price volatility is greater than fundamental volatility and for me technical analysis is a really important tool in the armoury of a trader
Last week we promised to have a look at the oil, USD and Aussie linkage to see what we garner for the future. Of particular note was the comment in the Lex article that sparked the original blog and one with which we don’t necessarily agree. That is that, Looking further back, the dollar’s epic
As you know, your currency blogger reckons that on any time frame you can group the key drivers of the AUD into 5 categories or drivers. The difference is that depending on the time frame being looking at you need to change the subjective weighting you give each set of variables. Technicals are much more
The FT’s Lex column has an interesting take on why the USD has not benefited from the “risk aversion” trade. The other day I hypothesised that perhaps there just wasn’t that many big “risk” positions on in the past few months so there was no observable impact on the USD. But Lex reckons its about
We have a market. That is we have now heard from the bullish camp on the AUD with Glenn Mumford’s article in today’s AFR representing quite a bullish outlook for the AUD which he reckons is going to 1.10 pretty soon. I’m expecting the local dollar to trend towards $1.10 over coming weeks…This next leg
You have to love FX markets, well at least I do. They always keep you honest both in intellectual terms and also on your profit and loss account. Just when you think the AUD is going to go down support holds and it bounces a cent or so. That’s what we’ve seen so far this
This blogger doesn’t like to crow because he has been around markets long enough to know that the Greek notion of Hubris is alive and well. But we wanted to highlighted a Bloomberg article out this morning which flows from yesterday’s blog and we hope will help readers understand that we are on the right
We don’t want to pre-empt our next blog on the relationship between the AUD and China but we thought there might be an opportunity to alert readers to the risk that the AUD is hanging by a thread up here in the 1.00/1.02 region against the USD. Already AUD/JPY has turned sharply and AUD/EUR, AUD/GBP
Unconventional Economist put up a piece on this Blog the other day on Commodities, China and the AUD after comments from one of the best forecasters in the business, A. Gary Shilling, that you should sell the AUD because China is going to have a hard landing and demand for our mining related exports would fall.
What drives the AUD/USD exchange rate? You would think that it’s a question that is fairly easy to answer yet conventional currency forecasters still have difficulty get their point forecasts right. I’m not making excuses for these guys and gals in the punditry but I’ve always thought that there was a little bit of an
Cycle analysis is very important. It tells us the phases of the moons, the size of the tides, the seasons and perhaps even when the lemmings are due for a run. But can it really tell us when the AUD is going to rise or fall or the size of the bond market sell off
Sure enough, markets woke up late Friday to the truth about the RBA’s Statement on Monetary Policy. That is, it was far more dovish than the chatterazzi made out. By the close, the dollar was some half a cent lower on the day and well below the level it was when the statement was released.