The Aussie dollar rose and fell last night as the euro weakened against the US dollar on more fears about European banks. It traded as high as 83.50 US cents and down to 82.50 as the euro fell nearly 2% against the greenback.

And that was the overnight currency trading: elevated risk fears, a Spanish banking rescue and big merger, worries about other euro banks, shares down or weak, commodities soft to lower (gold and copper a touch higher). If the Aussie hadn’t fallen, it would have been a very interesting story. Instead it fell in late trading as Wall Street was sold off. In fact, given the fear and loathing we saw last week, an almost positive day and night for the currency.

And nowhere did anyone single out the RSPT as hurting the dollar, despite the continuing claims to the contrary from the likes of Joe Hockey, Tony Abbott and Andrew Robb (the three blind mice of Australian economic commentary), supported by some of our more excitable commentators.

All tried to use the fall in the dollar late last week as evidence “the market” had (somewhat belatedly) decided it didn’t like the RSPT. No, it’s not the tax debate, nor is it it a “raid” or “capital strike”, as one impressionable online columnist would have us believe.

The claim that the Aussie dollar is somehow a floating indicator of the economic rationality of the Australian government is a fairy story for small minds and insular politicians trying to score points against their opponents.

Here are some facts for the coalition and their commentariat mates to chew on:

  • The Australian dollar is a global proxy for risk: when fears about risk are low or falling, the Aussie dollar rises because the US dollar is usually weak and commodity prices are rising.
  • The Aussie is the world’s sixth most traded currency, while we are about the 20th largest economy. In other words, the Aussie is more important globally than the size of our economy would indicate.
  • There is a plentiful supply of US dollars here because of our strong resource exports (all of which are priced in US dollars), so it makes us an easy play when confidence about the global economy, and especially China, is high.
  • The forex market here and in Europe and the US (and Asia) in Aussie dollars is liquid and easy to enter and leave.

So when investors are confident and China is rising, you see investors of all sizes borrowing in yen (and lately) in euros and investing (going long) in the Aussie dollar (or the NZ and Canadian dollars). That drives up demand for the Australian dollar, as we saw over the past year.

And driving that rise in confidence and desire to be “long” the Aussie dollar, has been the rebound in the Chinese economy and the strong recovery in commodity prices. Seeing iron ore and coal are not traded on exchanges but in an informal spot market dominated by suppliers and buyers (although some investment banks are trying to muscle in), the easiest way to buy China (and the yuan is not convertible to other currencies), is to buy the Aussie dollar and/or metals (say options over copper or nickel, which is a prime steel making raw material used in stainless steel).

So when the eurozone crisis erupted, the Aussie dollar suffered because fears about risk started rising. The near-miss on Greece, the unilateral move by Germany to ban n-ked short selling against some credit derivatives and bonds and the shares of Germany’s 10 major financial groups, on top of the shock of the May 6 Flash Crash on Wall Street, all played a major part in undermining the recovery in risk appetites among investors that has driven the strong recovery in the markets since March, 2009.

But the prices of commodities such as copper, gold, oil, silver, nickel, lead, etc (and even the spot prices of iron ore and coal) have all fallen in the past few weeks because there’s no longer a high level of confidence about the global economic recovery story, and especially China’s economy.

And when confidence falls, investors pull back, sell their long positions to square up, which increases the selling of the dollar, driving it lower.

So did the RSPT undermine the dollar? For a day or two it probably was a marginal contributor, but the story had been well leaked for more than a month before it was announced.

And here’s what the likes of Hockey won’t mention: BHP, Rio and Fortescue, not to mention a host of smaller companies (especially gold miners), have benefited from the drop in the dollar from just over 93 US cents a month ago to just under 83 cents this morning.

The impact will be felt very quickly by companies selling or who have sold commodities such as gold, copper and nickel into world markets in the past month. If they have sold and got their US dollars and converted them into Aussie dollars, they’ve had a nice bonus that has softened the blow from falling world prices.

In fact, companies such as BHP and Rio Tinto (which report in US dollars, but pay dividends, tax, etc, here and wages in Australian dollars) have made nice gains.

If we were as as excitable as some columnists and believed the idea that the tax debate has driven the dollar lower, then you could argue that BHP and Rio Tinto (plus Twiggy Forrest, from Fortescue) have been “talking the dollar down” for gain and have had a vested interest in continuing to do so.

And that Joe Hockey, Tony Abbott and Andrew Robb have been assisting them. But on recent form, you’d wonder if the three blind mice had the wit or cleverness for that.

Either way, the domestic Australian debate doesn’t matter much. The key domestic issues are Reserve Bank rate decisions, or the release of key statistics (or significant comments by the Treasurer or PM), which have much greater impacts on the day-to-day value of the currency than the moans and groans of companies such as BHP and Rio and their cheer squads in the media, the markets and consultants looking for work.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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