Jonathon Shapiro is one of the AFR’s better journalists. But today’s op-ed on the implications of a high dollar is not among his best work. In fact, the piece is so limited in its scope that it makes me wonder what kind of discussions transpire at the national business paper about the currency and why:
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.
Cross-posted from The Conversation. James Laurenceson is currently a Senior Lecturer in Economics at The University of Queensland. He has previously also held appointments at Shimonoseki City. ———————————————————————————————— Julia Gillard leaves Australia for China tomorrow, her second trip to the Middle Kingdom as Prime Minister. As befits China’s status as Australia’s most important trading partner, the
The wait is over and JPY traders globally will be tweaking positions as we head into the afternoon and the long-awaited BoJ meeting. Local news sources (the Nikkei) have suggested the bank will increase its Asset Purchase programme (APP) by ‘only’ ¥1.2 trillion a month, which is far short of the ¥2.0 trillion a month
The markets were less focused on Cyprus and more focused on some weaker than expected data out of the US overnight with stocks a little lower and the US dollar a little weaker. Interestingly, the Tankan survey in Japan yesterday didn’t stop the yen from strengthening in what looks like both a technical move and
The euro and the Aussie came under some pressure overnight as the former continues to be buffeted not just by Cyprus but also the Italian political impasse and weak European data while the latter continues to do well on the crosses but just couldn’t hold the up trend under the weight of negativity thatis just enough to
The Australian dollar is the clear winner from what is going on in Cyprus at the moment and the fact that it is rallying still while gold has failed to keep moving higher suggests that money is flowing away from European assets and towards Australian assets. Last night’s move in the Aussie saw a high
I had grave concerns about the Dutch Finance Minister Jeroen Dijsselbloem and his ability to lead the Euro Group and command the gravitas and experience necessary for that position. Overnight we saw that he is still wearing his L-Plates as he torpedoed the markets rally after the Cyrpus deal was announced. In an interview with Reuters and the
So the emotional roller coaster continues and the markets were worried about Cyprus again overnight. That is now four trading days where we have been worried, not worried, on and off. This suggests that Cyprus might be a convenient ex poste excuse rather than an ex ante cause but hey who am I to argue
The VIX volatility index hit its lowest level since 2007 overnight as the Dow printed another new all-time high and the troubles with Italy and the problematic Chinese data over the weekend were ignored. As you can see in the chart at right, which is the VIX over the past 12 months, the markets estimate of volatility
The US dollar is doing something very strange at the moment. Well, not that strange, after all it’s really just something that we haven’t seen for a while. That is, the US dollar seems to be re-establishing a positive correlation with moves in the stock market and is rallying along with the Dow and the
Bloomberg is carrying an encouraging story on the release today of Japanese capital flows data: Japanese portfolio investors reduced Australian-dollar bond holdings by 439.3b yen in January, Ministry of Finance data show. This is the third straight month and the longest such stretch since six-month stretch ended July 2007. The data eludes me but there
Alan Kohler may have joined the elite cheer squad of Australian dollar strength this morning but its all looking in vain at the moment. The Australian dollar looks weak and weakening to me. Today there’s no surprise about why with China’s property bubble going mainstream and the weekend’s property curbs whacking rebar futures big, as well
By Chris Becker Apologies for missing last week’s missive, but I was helping friends and family cleaning up from the torrent of rain here in Queensland – some Sunshine State! So here’s this weeks roundup of what happened in major macro markets. Remember, the following views are my own, do not constitute advice and are for
From AAP: President Barack Obama has accused Republican rivals of threatening the fragile US economic recovery by failing to move forward on his deficit reduction plan before severe budget cuts kick in. Mr Obama said that by refusing to allow a vote on a Senate bill that includes a balance of tax revenue and targeted
Cross-posted from FTAlphaville. Strong currencies are the bane of every triple-A rated, QE-less economy in currency war-torn 2013, it seems. It’s become an increasingly irksome point in Australia, where the initial exuberance over cheap foreign holidays has been slowly replaced by worries that it’s squeezing the non-mining sectors. An FOI request by Bloomberg yielded a bunch of documents from
The RBA has released a goldmine of analysis on how overvalued is the Australian dollar following a freedom on information request (God knows why this is not on the public record anyway. The market response was obvious though brief, above). The bottom line is that RBA reckons: Most models – including the staff’s internal models
From BS, Julia Gillard joins the cavalcade of officials seeking to boost the Australian dollar: “We can still be a country that manufactures things. But we’re going to have to do it differently…The dollar is likely to stay high for some period of time.” …”The competitive disadvantage of the high Aussie dollar is obvious but
The uncertainty caused by the Italian elections continued to reverberate around markets overnight with European stocks under pressure and the US dollar and gold benefiting materially from the malaise. The election result seems to have come as somewhat of a surprise to the established players and clearly also the markets. Stocks in Milan fell 4.9%
In 2010, 2011 and 2012 the problems of Europe hit the markets in late April and early May. I have been expecting something similar again this year given that the euphoria of the near death experience Europe is starting to give way to a recognition that the Eurozone economy is in dire straits still. The
RBA boss Glenn Stevens is in Parliament today for his annual testimony. Find below his opening statement which is noteworthy for its glass-half-full approach to the mining growth hand-off and his confession that interest rates have targeted the dollar in some measure. Sadly, markets interpreted the balance of these two arguments as bullish and added the better
The RBA’s monthly foreign transactions data is out today, and nup, still no hand on the head of the battler:
Here is what happens when serious macro managers make utterances about overvalued currencies: This is the NZ dollar losing 0.6 of cent as Graeme Wheeler, the new head of the RBNZ, said: “When the New Zealand dollar is coming under upward pressure, we want investors to know that the kiwi is not a one- way