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Aug 2013 - A$ Going to Fall

  • In the post Diggers weekend AFR, page 40 had an article titled "Currency - Spike in Aussie will be short-lived"..............in our/ERA experience "will" is a dangerous word, as it gives no "lee-way" - "expected to be" may have been safer.
  • The AFR article focuses on the realisation that China is slowing down (a different opinion to our Purple Patch July Resource Roundup emailed on 26 July 2013, and also in complete conflict with page 12 of the same 10/11 August edition of the AFR that China's growth was on-track to meet its 7.5% target, especially after China's industrial production jumped from 8.9% in June 2013 to 9.7% in July). The article also expected that (on the basis of a China slowdown) the RBA would have to consider rate cuts.
  • The IP jump should not really have been a surprise, iron ore prices have remained strong, and the iron ore producers at Diggers ([in no particular order]: Fortescue, BCI, Mt Gibson & Atlas) all made comments along the lines of being unable to meet demand for their iron ore products/deliveries, and consequently still expanding where possible.
  • In the AFR article, CBA were quoted as stating that they envisioned the A$ as heading for their forecast of 85c by the end of 2014, and sub-80c over the longer term. The recent strength to 91c was due to the Fed to-ing and fro-ing about when the QE taper is going to start (as in Sept or Dec) and hence resulting in minor weakness in the A$. The A$ was expected to be depressed because rate cuts by the RBA and closing bond yields between Australia and the recovering world would have to depress it.
  • But let's face it, most A$ forecasts for a weak A$ were wrong last year, because they did not factor in a weak US$ and a weak Euro. As the keynote (ex-IMF) speaker in the Diggers 2012 Q & A session after his speech stated last year, the A$ could be relatively strong because it was a safer alternative to the US$ and the Euro, and offered a higher interest rate. The "hot money" was hence probably temporarily parked in the A$, and has weakened with a stronger US$. Last years' Diggers' speaker made no mention of China in regards to the strength of the A$.
  • The post Diggers keynote speech Q & A sessions are usually when the "gems" come out over what may have an impact in the world and hence affect Australia, and sometimes the speaker links the "gems" to their speech. This year (2013) was no exception.
  • This years' 2013 Diggers' keynote speaker was Austan Goolsbee (a former Obama economic adviser), who stated in the Q & A that he thought that QE would historically be viewed as an essential event. The fact is that QE is a combination of monetary x volatility/velocity of money. But the volatility is down, so hence there is no inflation. QE is printing money to avoid deflation, and create growth and hence he thought that it has to continue until the US turns around and its growth exceeds 3%, ideally back to its previous levels of 3.5%pa. (Note : it would appear that the rising debt is not an issue, because the US has to print money in order to grow).
  • However, the US is currently mired with 2% growth and 2% inflation, the growth for the 2nd Qtr of 2013 was 1.7%. In the US, if growth stays ~2%, then that is regarded as "the steady state", and no one really needs to be hired. The US has not had its usual "V" shaped recovery, so far, it has an "L" shaped one.  It could become a "U" shape if the US has a "housing bubble" because the US turns on housing, but that seems unlikely, so that means probably little change for the next 6 months as the growth rate is expected to remain below 3% for the remainder of 2013.
  • At least 70% of the US agree that Govt spending is out of control, but no lobby group wants to have a cutback, as in reduction of its benefits. So the US is grid-locked and can't agree on a solution. Austan drew an analogy of unblocking an apartment's kitchen sink drain full of lasagne with a shotgun and due to a u-bend the lasagne ends up splattered in another apartments kitchen. Clearing the lasagne was resulting in dumping the problem onto someone else - and apparently that is what Washington DC is currently doing.
  • Austan thought that although the new Fed governor (replacing Bernanke) may or may not have differing views, it probably mattered little, because they would be "locked in" to the existing processes.
  • Fortunately for the US, the EC appears to be in a worse state, with its banking system currently perceived as not solvable and its govt bonds similar to the US mortgage backed securities debacle. Ideally the Euro needs to devalue, but Germany having bailed out East Germany appears unlikely to accept bailing out the rest of Europe too. W Germany solved its crisis through labour mobility from E Germany to W Germany and a US$1.3trn subsidy to E Germany - that solution is not available for the EC. Austan envisaged a probable financial crisis in Europe every 6 months or so until they solve it.
  • The US has so far been the only country to print money and avoid inflation and a weaker currency, because it is printing a recognised reserve currency, namely US$. Other countries have printed currencies that have been based relative to the US$. As the President of Argentina commented a month or so ago, what she needed was a printing press that could churn out US$, not Argentinian currency or a substitute currency.
  • A drifting US, may result in a drifting to lower US$. As far as Austan was concerned, the key to a US recovery without housing construction was when the 25-year olds have to move out and buy poor quality pots and pans, and pay rent. However, Austan also thought that the Shale gas revolution would reduce US energy costs with a resulting impact on manufacturing, combined with selective growth city areas in the US (such as Seattle, San Francisco and Silicon Valley) also gradually resulting in a US recovery. 
  • Austan thought that Australia would feed off the growth of others, such as Asia/China and the US, while the EC faced greater issues.
  • So yes, it's great to have a weak A$, gold at A$1450/oz and 91c looks a lot better than gold at US$1320/oz and a 1:1 exchange rate. It may be on a wish list for a number of companies and industries for the A$ to fall to 85c or lower, but as they say "don't count your chickens before they have hatched".

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The A$ will fall won't it?
  • Written by: Keith Goode
  • Thursday, 01 August 2013