Australian Dollar to 1.25 – who cares?

March 9, 2012

FOREX

Let me ask you a question.

Do you care if the Aussie Dollar heads toward 1.20 or 1.25 in the next 12 to 18 months as Australia’s alternative Treasurer Joe Hockey said the other day.

In the Sydney Morning Herald Mr Hockey was quoted as saying,

”it is not inconceivable for the Australian dollar to reach $US1.25 over the next 12 to 18 months”

I agree, it is not inconceivable that the Aussie heads to these levels not seen since the 1970’s its a low probability I think that one that has enough serious implications that we need to have a planned response for industry from government.

So I was encouraged that the SMH also reported Mr Hockey said,

It is time to carefully consider what a comparatively high Australian dollar means for key sectors of our economy.

Big tick Joe! Or at least I thought there was a big tick but then I saw that he also said,

In a warning to those in the Coalition advocating protectionism, Mr Hockey said it would not be propping up unsustainable industries.

While it was worth providing help to those industries facing short-to-medium-term pressures, such as the high dollar, industries which are proving unsustainable over the longer term for many reasons would not be saved.

While they could be eligible for such assistance as retraining or relocating workers, ”we should not, however, be in the business of propping up industries that for many reasons do not have a sustainable future in Australia”, he said.

He said the ”brutal truth” was that managers and consumers, not government, would determine the fate of individual businesses 

Theoretically and politically I have probably always been to the right of centre, as I age and since I’ve become a dad I find myself moving to the left on social issues but in general I’d normally agree with the sentiment of what Mr hockey is saying above.

Certainly I welcome the fact that he is thinking about my oft mooted plan to assist companies and industries that are being buffeted by the high dollar  and in general why would you prop up other industries that are on the way out. Its my typewriter/iPad analogy I’ve used a few times now.

But what bothers me about the political class in Australia at the moment is that they take acceptable and plausible theoretical constructs and write them into stone as laws.

Take the Budget surplus at any cost pact between the two parties as an example – at a time of massive structural change in the economy, structural change that has the RBA on the back foot in managing this sports car/draft horse economy there may be, probably is a need for some support in some parts of the economy.

But no we can’t do that – Swanny and Hockey are too busy leading the war cry each morning.

SURPLUS, SURPLUS, SURPLUS, Oi, Oi, Oi.

Even if the Treasury Secretary Martin Parkinson says they are going to be “only wafer thin”

And so it is with the Aussie Dollar’s strength – we know its high because the central banks of Russia, Brazil, China and others are buying and have bought lots of Aussie. We know its high because in a moribund economic global outlook even a print of 0.4% GDP growth seems still ok. We know the Aussie Dollar is high because our interest rates are high and we know that unless or until China slows and lets their currency float the Aussie Dollar remains its proxy.

So nothing is going to be done it seems as RBA Deputy Governor Lowe pointed out the other day. Bloomberg quoted him the other day saying they are watching things,

“It is possible for exchange rates to overshoot,” Lowe said in his prepared remarks. “While the evidence of the past 30 years is that movements in the exchange rate have been an important stabilizing force for the Australian economy, the unusual nature of the current forces means that we need to watch things closely.”

But I’ve always got the sense they are glad the Aussie is as high as it is cause it reduces the pressure to smash households even further with interest rate increases. I think Lowe makes this point below,

“On the evidence to date, something like the current combination of exchange rates and interest rates appears to be what is needed to maintain overall macroeconomic stability,” Lowe told the AIG, whose members include manufacturers hurt by the currency. “The high exchange rate and the high interest rates relative to the rest of the world are both being driven by the fact that Australia is a major beneficiary of the change in world relative prices.”

Indeed Deputy Governor Lowe feels the Aussie is not misaligned fundamentally

“It’s difficult to make a strong case that the exchange rate is fundamentally misaligned,” Lowe said in response to a question from the audience after a speech today in Sydney, citing the nation’s solid economy. “That makes the hurdle for intervention quite high.”

But part of this argument I think is flawed and circular. The price of our commodity exports is largely denominated in US Dollars and the US is actively engaged in a policy of making the Greenback as weak as possible without cause it to crash. And they are succeeding in using this to increase exports as a total percentage of GDP, quite a few percentage points over the past few years.

So while they win, commodities are pushed higher in price than underlying demand warrants because the USD is weak and we just suck it up and continue the experiment all the while knowing that other nations are deliberately manipulating their currencies to their own best interests.

I even saw an article in the Atlantic last weekend arguing that currency wars are good . The author argues that beggar-thy-neighbour policies are good,

Rather than cooperating, countries are fighting over trade. But in this case, some fighting is good, and more fighting is better. Countries that lose exports want to get them back. And the best way to do that is to devalue their own currencies too. This, of course, causes more countries to lose exports. They also want to get their exports back, so they also push down their currencies. It’s devaluation all the way down. All thanks to economic peer pressure.

Nobody wins if everyone does it. But for those who are happy with their theoretical purity that seems to pervade Australia economic thinking its a death spiral for currency exposed industries.

At a time of massive structural change where, as Bill Evans said yesterday, the mining boom is simply eye watering but the rest of the economy is under intense pressure I would like to think that we wont be trying to pick winners but we might find some money to ensure that we at least give ourselves and our industry a chance for survival.

It is clear to me that the push back from the policy making and political class on this topic of the Aussie Dollar’s strength is such that they recognise there is an issue but it is also clear they are trying to manage the issue rather than deal with it.

We are a small open economy with a currency that trades far too much for our relevance in the global economy and thus there is little we can do to halt its strength. We just dont have the fire power unless we want to print lots and lots of Aussie Dollars.

So it’s not easy but it would be good if as Joe Hockey said we consider carefully what the impact is going to be on our industry, on our jobs and on the fabric of our society in the years ahead.

You’re probably sick of hearing this from me but I think at a time of structural change it is important we talk about the structure of the change and the structure that in the end results from the change. now, ex-ante not in the future, ex-poste. 

Have a great day.

Gregory McKenna

www.twitter.com/gregorymckenna

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2 Comments on “Australian Dollar to 1.25 – who cares?”

  1. The Blissful Ignoramus Says:

    Excellent piece, Greg.

    I wonder what your thoughts are on the dilemma facing government viz implementing your strategy of industry support/abandoning push for surplus, given that it would appear returning the budget to … somewhere close to … surplus is necessary in order to keep the ratings agencies from nobbling our big vulnerability (IMO), the banking system? Any thoughts on which industries you would support, how, and importantly, in what amounts?

    >>”Theoretically and politically I have probably always been to the right of centre, as I age and since I’ve become a dad I find myself moving to the left on social issues..”

    Interesting 🙂 You are not the only one who is apparently moving somewhat contrarily to the saying that is (paraphrased) oft-wrongly attributed to Churchill:

    “Not to be a republican at twenty is proof of want of heart; to be one
    at thirty is proof of want of head.” ~ Francois Guizot (1787-1874)

    Reply

    • Gregory McKenna Says:

      Yes the theory to practice bit is the key. I see it as low interest loans, accelerated depreciation on new plant, payroll tax holidays, job support schemes and so on.

      Qualify for the assistance and the cost burden of proving how or that you do qualify is for me the biggest flaw in my logic. Don’t want it to be so burdensome the helping hand is just another layer of red tape.

      I haven’t worked in government so I’d need help on the implementation but I would just love to get the conversation going.

      I think it’s starting.

      Reply

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