The rise and rise of the Australian Dollar

February 18, 2012

FOREX

The Australian Dollar is higher than it has been in decades. Indeed it is more than 30 cents higher than the average since it was floated in December 1983. Yet while we see businesses constantly in the news contemplating or actualising job losses and off shoring the arms of government and policy makers here in Australia can’t, won’t or don’t want to do anything about it.

This is at a time when most countries in the globe seem intent on manipulating there currency to the best advantage that they can.

We have China with its crawling fixed rate to the USD – if this floated it would probably appreciate 10-20% over a fairly short period I’d posit. But the Chinese know they really couldn’t wear the loss to competitiveness that would bring right now.

We have the Fed and the US Treasury running policies aimed directly at keeping the Dollar, their one, as low as possible without triggering a collapse. Indeed why else would/could the Euro still be above 1.30 and the Yen recently retouched multi decade highs against the Dollar. Luckily for Japan as I wrote a few weeks back the worm is turning for the Yen – but a liberal dose of monetary stimulus this week from the Bank of Japan didn’t hurt.

And it’s working – US exports have risen a couple of percentage points as a share of GDP over the last few years. In an economy the size of the US economy that is not small change.

We have the Bank of England running policies aimed at targeting inflation of 4% in my view and thus lowering the “real” cost of the national debt and also I reckon targeting the Pound back toward the low 1.50 region.

And the Swiss didn’t bother with policies – like Australia their currency trade is way out of line with the size of their economy and ability to deal effectively with it. So they pegged to the Euro.

We have the BRIC countries running policies or intervening in their currencies to slow their rise while at the same time buying Aussie Dollars and Aussie assets – thus, if not driving the Aussie ever higher at least keeping it above parity and pressuring business.

And now we hear overnight that Norway has had enough as well (thanks to twitter mate @BarnabyisRight for the tip off). You can see why in the chart below of the EUR/NOK (that is, how many Norwegian Kronas will 1 Euro buy – the chart heading down is Euro weakening) rate which hit a 8year high this week.

Bloomberg reports that the Norwegian Central Bank Governor said

“We follow closely the krone developments,” he said yesterday in an interview in Oslo. “We have observed, of course, the recent development of the krone, we’re close to the level” in September, when it touched an eight-year high, he said.

20120218-063333.jpg

You can see why in the picture above.

Which brings me back home to Australia.

I still call the Aussie Dollar “the battler” – its a legacy of it past when it always caught pneumonia at the first signs of the slightest global cold. But back then we didn’t have China, a mining boom and a central bank, our beloved RBA, with a structural bias to tighten in a world necessitating the exact opposite for most countries ( if you are interested why here’s a blog I did last April which explains why the RBA has a bias to tighten ).

It doesn’t battle much anymore though does it, well except for supremacy.

But what to do?

Readers know I don’t favour pegging the Aussie Dollar as I believe it would just transfer the stresses to the internal economy and merely transfer the problem somewhere else in time.

One thing note though if I am to be truly frank in many ways people like myself contribute to the strength because we buy and sell currencies for gain. But that is why I am for an industry support scheme not a fixed peg. Why? Not because I want to keep trading it but because I know that in the current environment offshore investors will still want Aussie assets so at some fixed rate of exchange ( assuming a fix ) the RBA would sell Aussie Dollars to whoever wanted to buy them, these dollars would then need to be put to work which would likely be in Australian interest rate markets (equally a fixed rate may make Australian companies cheap and very attractive ) thus driving rates lower than the RBA wants them and possibly making lending cheaper again and igniting th next housing boom – great, NOT. Sure the RBA could put rates up to counter this but that will make Aussie Dollars even more attractive. The reverse is also true when foreigners are selling Aussie but harder to counter for a small central bnk like the RBA.

So, I continue to favour industry protection in the manner of drought relief for farmers. In this way we aren’t picking winners we are just saying conditions are uncomfortable, nay untenable, and we want to help because we value a diverse economy. But this idea looks like its going nowhere fast given what Australian Treasury Secretary Martin Parkinson’s said this week as reported in the Australian,

TREASURY secretary Martin Parkinson has warned the government against protecting failing industries, arguing it risks taking Australia back to the economic situation it faced prior to the 1980s economic reforms by the Hawke-Keating government.

Appearing before a Senate estimates committee this morning, Dr Parkinson stressed Australia must manage the transformation confronting the economy and said the government faces a choice between developing new opportunities or trying to hold on to what exists now.

He said the history of the 1960s and 1970s had shown that attempts to protect industries struggling to be internationally competitive had ultimately been overwhelmed by economic forces.

And attempts to repeat the attempts at protection in the 1960s and 1970s risked returning the nation to the point where it faced the same challenges that sparked the Hawke-Keating reforms.

“Our own experience in the 1960s and 70s show that if you try and protect industry from change rather than encourage change, then you run the risk of ossifying your industrial structure and losing competitiveness,” Dr Parkinson said.

This approach risked losses in productivity and living standards

“We are seeing some of the business models being challenged by the global transformation,” Dr Parkinson told the hearing.

But he said there was a major opportunity for the economy to link manufacturing to high-skill, high-knowledge based approaches which would create “vibrant” sectors of the economy.

This would help enable a high-knowledge, high-productivity economy.

But let’s look at that idea – if the Aussie Dollar is 30 cents above its long run average or roughly 40% then that is a heck of a productivity gain Martin is looking for. And exactly what change is he talking about? Technological? If that’s it then sure I agree no point having a typewriter factory when I am writing this blog on an iPad is there.

20120218-070908.jpg

But look at the chart above of the last 5 years of Aussie Dollar trade isn’t this the real change then Martin’s so called change is simply an offset to a strong Aussie Dollar driven by the money manager capitalists at foreign central banks and investment funds then this approach really does risk Dutch Disease.

Which brings me back to Norway. Bloomberg reported overnight,

Feb. 16 (Bloomberg) — Norway’s central bank Governor Oeystein Olsen told the government to spend less of the country’s oil money and avoid an over-reliance on its commodities wealth or risk killing manufacturing jobs.

The government should tighten its fiscal policy guidelines and limit the use of petroleum revenue to 3 percent of Norway’s sovereign wealth fund from the current 4 percent, Olsen said today in the text of his annual speech on the economy and monetary policy.

“Even though petroleum revenues are phased in gradually, a phasing out of manufacturing and other private industries may not be as smooth,” he said. “Entire industries could be lost. If spending proves to be excessive, such structural changes may be difficult, or impossible, to reverse.”

The world’s seventh-largest oil exporter, which boasts the biggest budget surplus of any AAA rated nation, has largely been shielded from the global financial crisis, in part after spending a record amount of its oil money. The statistics office estimates Norway’s economy, excluding income from oil and shipping, will grow 2.7 percent this year, versus a European Commission estimate for only 0.5 percent in the euro area.

Finance Minister Sigbjoern Johnsen said the government has “no plans” to heed Olsen’s advice, warning policy makers need to be “careful” when considering such changes, in comments to reporters in Oslo.

My bolding but that’s the nub of the debate – practical people see the risks of an over reliance on the resources boom either here or in Norway but ideologues do not.

We know the RBA and Australian Treasury are on Board with a multi-decade China boom but do they really want to napalm the rest of the economy and just leave us with an economy full of houses and holes.

I hope not but I fear so.

www.twitter.com/gregorymckenna

Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation

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6 Comments on “The rise and rise of the Australian Dollar”

  1. tristencosgrove Says:

    Great blog Greg. The debate extends in the extreme to how much the world wants to retain soveign nation states versus the push towards everything being globalised with no nation states at all. There are actually many well-respected academics and commentators who state that they think there should not be any national systems, only a single global one, or in the interim, large blocs. One of their arguments is that nations war with each other, and with nuclear weapons now a feature, this is insanity and the solution is no nations. Back to the local issue though, whole industries are at risk, nations are encouraged to specialise (be interdependent rather than independent) to a degree that they become dependent on the international system for their needs rather than be self-sufficient as many were in the past, and some are trying to be even still (perhaps more now with the ongoing GFC or Global Economic Downturn (GED)?). Industries that make tools for example are important because if you can make tools, you can make other things. We should also look after industries for national security reasons such as energy and food security. Protectionism can also be used by un-competitive businesses and politicians to reduce the relative competitiveness of efficient and productive businesses in that industry so in helping an industry we should try to find a way not to hurt the actual winners in that industry (see the movie or book “Atlas Shrugged”). I do fundamentally support the concept of a nation state and the concept of a strong Australia as a proud, self-sufficient, sovereign nation state (and I am comfortable with the concept of the Monarchy as our Head of State, as it seems to work quite well, we can change that perhaps if it does not work in future). To be a self-sufficient island, we need to retain our important industries and probably try to develop more new ones if we can. Not to reward the lazy but to retain (or regain) our independence.

    Reply

  2. Andrew Says:

    Love your Bloomberg. Do you subscribe to the full package Greg?

    Reply

Trackbacks/Pingbacks

  1. The Single Biggest Reason Why I Will Vote For Bob Katter’s Australian Party « Barnaby Is Right - February 18, 2012

    […] read his article. Greg agrees that action to alleviate the impacts of the high AUD is vital. He also has some […]

  2. Gittins is just plain wrong on the Aussie Dollar and manufacturing | Lighthouse Securities - February 27, 2012

    […] week ago I wrote about this very topic after hearing Australian Treasury Secretary Martin Parkinson’s similar […]

  3. Australian Dollar To 1.25 – Who Cares? « Barnaby Is Right - March 9, 2012

    […] article cross-posted from Lighthouse Securities, with kind permission of Greg McKenna. You can follow Greg on Twitter, and at MacroBusiness where […]

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