Economy

Apr 23, 2014

Australia is swaggering, unarmed, in the global currency war

The Australian dollar isn't losing against commodity competitors but manufacturing and service economies. So how long will it last and can anything be done about it?

The Reserve Bank of Australia appears to have rolled out board member John Edwards to counter yesterday’s government leak that it was annoyed that the bank had allowed the dollar to rise beyond forecasts. From The Australian Financial Review:
... Dr Edwards said Australia was in the grip of a 'bountiful' mining and energy export-driven revenue surge ... "It’s very difficult to expect rhetoric to have an impact on economic forces which are running in the opposite direction," he said. "If you’ve got a mood going on in the currency, then rhetoric alone is not going change it ... "The currency argument is that a fall in the terms of trade should see lower exports and therefore less demand for the Australian dollar. It’s not working out like that. In fact US dollar revenues have increased [for local mining companies]. "And the balance of trade has for several months been positive, once again. And that means, in terms of what happens in foreign exchange markets, you wouldn’t necessarily expect to see a weaker dollar if it’s associated with, effectively, a boom in exports." … Opposition spokesman on finance Tony Burke said the government’s anger about the Reserve Bank was extraordinary. "After years of both sides of ­politics agreeing on the need to have an independent Reserve Bank, Joe Hockey has decided his political needs are more important than the independent status of the bank."
The dollar has turned for a number of reasons, the volumes boom being just one and probably the smallest. The current trade surplus will disappear in the next few months as much lower bulk commodity prices filter through to quarterly contracts, despite volume growth. The trade deficit will grow further over the next 12 months as iron ore goes much lower. Equity markets, too, are underestimating the impact of falling iron ore prices on earnings with Rio Tinto and Fortescue Metals Group both holding up better than they should given their prospects. In short, markets are not discounting the future that is coming. That could be seen as a "mood". That attitude comes from four combined shifts in first-quarter global circumstance which really amount to one thing. The United States recovery has again disappointed, pushing back rate hike expectations. China has hit the stimulus accelerator again (albeit mildly), the European Union is clearly in the process of entering the money printing race as deflation looms, and Japan’s "Abenomics" burst is slowing and requires more money printing to get going again. In short, we’re traversing an echo period of competitive monetary devaluation in which the US dollar is held down, commodity-intensive emerging markets are seen as the growth driver and real assets are seen as value protection. This is putting upwards pressure on all of the commodity currencies, and gold, not just the Australian dollar. Here is the Aussie versus the Brazilian real:

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