Story of AUDUSD
…. its the 28th of September 2012 and I have a very interesting dilema in my mind. Ive been shorting the AUD recently, because all fundamentals simply support that idea. Australian economy struggles the overvalued currency and that is shown in decreasing local credits and possibly hurting the economy in the future – if we accept the theory that aussie mining boom is going to the end soon. Well, nothing lasts forever and we must consider that all worlds economy is running in circles, so if …for example China expands at double digit pace, then this cant last for decades and decades. And if we look at the aussie budget, we see a serious part of the GDP as an export to China, mostly production of the local mining companies. Australia consists of 22.6 M inhabitants, unemployment rate is currently at 5.1% and yesterday Ive read a news headlines that „Australians are actually 331B AUD richer than we thought, because a statistics mistake was found“ … everything looks like a paradise and investors happily transfer their money into this stable economy. It is also important to mention that australian banks are not broadly exposed and their risk assets stay at very low or zero levels – that gives them another advantage from the outer world.
Question is now: „Why should we invest elswhere if we found a paradise?“ …we have 3.5% IR economy, stable background and booming mining industry. Well, that actually can be the problem. If too many people target their investments into such a well performing economy (while the rest of the world struggles!!!), its currency gets too strong. It gets stronger than it is supposed to get in a natural way and in the end there is a currency bubble occured.
Expensive currency makes less attractive for tourists to come – is it funny to mention this in context of the whole economy? If american tourist doesnt spend the whole week on the seaside, instead he spends only a weekend or four days. The same tourist doesnt go to a fine restaurant and instead he chooses much cheaper variant. Next time he doesnt go to the country anymore. This is just a begining, a detail, one piece of a puzzle. Expensive currrency makes mainly exports less competitive!! Economy like Australia really needs to be competitive if it wants to stay on the top of the range with its GDP.
So in nowadays we face several major factors potentially dangerous for Australia:
Proposals for the RBA?
… its easy, very easy …. lower the basis IR by 0.25 – 0.50% and this way react adequately in advance. It is generally known that if a central bank or a government wants to avoid the crisis, it must act in advance. Problem of many central bankers around the world is that they react when the economy cycle is already too high or too low and they only help it to fluctuate even more. Right now, RBA has a very good chance to act in advance and ease the situation by small depreciation of the local currency. In the conditions of global markets, it is not recommended to keep interest rates too high – simply because investors will face this as a „safe haven“ opportunity – lots of money will flow in the economy – and this amount will be higher than needed – effect is too strong currency and lower competitiveness …. this process can last from several months to more than a year and in the end there is economy which losts some part of its momentum only by this artificial way. Not naturally, but by artificial inflow of capital which only harvests the interests.
Economy which is so much export-based, should really control the prices of its production and if there is an alarm from the most important industry (mining in Aus.), then central bankers are supposed to act and make steps towards effective solution. Australia is in a very good position, because there is enough space to lower the IR to prevent lower competitiveness.
If RBA reacts in advance enough – which means right now, it can save lots of money from mining industry. The country will produce the same amount of ore, but will be paid more nominal price. Small businesses like local tourist areas will also generate higher profits and their services will become attractive for local citizens and tourists as well. Just the only thing is that RBA must react at the moment when the general economy performance cycle is not low, because if it reacts too late, it will only deepen a potential crisis or lower output.
Even lower global commodity prices wont hurt the economy if the local currency reacts to these price shocks. It is obvious that global economy is in a deep recession now and there is no reason not to accomodate this fact to the monetary policy. Australia, right now as it is, can only benefit from the current situation – if it adapts itself for the actual price trends.
…simply said: “make the economy affordable” …
…Aleš Knupp, MSc