Slowing but surely, the Australian dollar is losing value at a time when it should be rising. There’s a very real chance it could dip under parity with the US dollar, relieving pressure on much of manufacturing and the federal budget if the fall is sustained and long lasting.
After riding out the volatile period from December through January and into February, thanks to those doubts about Greece and the eurozone, the Aussie has lost ground, especially since Greece’s future was assured for the time being last week.
The dollar hit a seven-week low this morning of around $US1.0450, and has fallen 4% since the start of the month when it hit a recent high of just over $US1.0815.
The fall has come despite the obvious improvement in world markets, the solid rebound in the US markets, the ending of the Greece default fears for now, and a fall in volatility. And, if anything, the past couple of weeks (apart from Wednesday of last week when markets fell on those fears about Greece), sentiment has been more towards “risk on” investing, which is normally a time when the Aussie dollar is in greater demand.
Instead the US dollar is in demand for a variety of reasons led by the turning economy and falling unemployment. Yields on US 10-year bonds hit 2.18% overnight, the highest for seven months. That’s despite the current campaign of the Fed to force down long-term rates and hold them there. US 309-year bond yields also rose to a seven-month high last night. US bond yields are rising because the economy is looking better and silly American investors are worried about higher petrol and oil costs boosting inflation. The Fed says that will happen, but will only be temporary.
Gold prices have plunged as well, losing more than 4% or well over $US60 an ounce since the start of this week on the “good times” are back for the US economy. Gold bugs seem to be ignoring the story that those inflation fears are returning to haunt markets.
The weakening in the dollar is showing up in the way our stockmarket is performing: it’s out of step with much of the rest of the world. The ASX 200 index is still only 11% above the low it set on September 26 as Europe’s sovereign debt crisis re-emerged as a concern. The Dow average has risen by 23.7% since October 3, and the MSCI world index is up 21.8%, European and Asian markets are up solidly: Tokyo is up more than 20% so far this year as the yen continued to fall against the US dollar. European shares have done as well as our market, up 11% and they have real problems.
Driving the dollar lower is a worry about the future level of Chinese economic growth and therefore demand for Australian commodities.
At the same time, it is becoming more apparent that global pries for our key exports of coal and iron ore have peaked and are weakening. Iron ore prices are currently around $US140 to $US143 a tonne, down sharply from the $US183 of a year ago. Coking coal prices are now around $US206 a tonne, against more than $US280 a tonne a year ago (after the Queensland floods and the iron ore problems in WA). Thermal coal prices have plunged 30% or more to around $US105 a tonne as surplus US coal is dumped on world markets.
Because thermal coal and soft coking coal are fungible to a degree, the fall in thermal coal prices will tug coking coal prices lower in coming months. That will continue until the supply/demand balance in the US is stabilised, especially in the power industry. Cold weather next winter could do that, as could a very hit northern summer which chews up coal stocks to meet the demand for air conditioning.
Some analysts are warning the US could start exporting LNG into the Asian market to compete with Australia (they face a shipping cost problem) but the impact on coal prices is far more immediate.
And what’s the bottom line for Australia should these weak prices continue? Well more trade deficits or much smaller surpluses. Australia exported thermal coal worth just over $A15 billion in calendar-year 2011 and coking coal exports were valued at more than $A31 billion. So a 10% drop in prices across the next year would make a substantial dent of around $4.5 billion in our export income.
But that would be mitigated to a degree by the weaker Aussie dollar, especially if it moves decisively under parity with the greenback.
The downward pressure on global coal prices is coming from the rising tide of US gas production which is displacing coal in power generation because gas prices have plunged to their lowest level in a decade or more and will remain there for years to come. Coal’s share of US power generation fell under 40% in December for the first time in 27 years.
Our terms of trade fell 4.7% in the December quarter, but the dollar remained high, an occurrence remarked upon several times by senior Reserve Bank officials from Governor Glenn Stevens down in speeches and public comments in the past month. The RBA is clearly waiting for the currency to fall.
It will come and could be around for a while thanks to the rebound in the US and the soaring US gas production, which is changing the global energy picture much faster than any one thought.