The Australian dollar has had a very good Christmas-New Year break, but don’t expect our business journals, commentators or analysts to tell you that. It is far easier for them to pitch the gloom and doom line on behalf of clients, mates or easy headlines, courtesy of the retailing, manufacturing or tourism sectors — and then there’s the latest fashion, fearless forecasting of “white collar recessions”.
Nor have we heard from our politicians about what a strong dollar really means for them and us (as taxpayers): not quite austerity, but it will feel like it as the need for brutal honesty about budgets, spending and spending overrides (at the demands of markets), the easy way of spending future income on present needs.
There’s been little in the way of a dispassionate look at the way the Australian currency didn’t slide over the break, why it didn’t, and what it means. That performance says more investors overseas now view the Australian dollar as a store of value in troubled times. There are still risks, given we are a commodity based economy, but the currency has other virtues: low debt, falling government spending, excellent growth prospects and a universally-endorsed AAA credit rating (and transparent, reliable legal and accounting systems).
The Aussie’s strength from the start of last December up to now has been remarkable. The US dollar has risen by around 7% against the faltering euro; normally the Aussie dollar weakens as the US dollar strengthens, but that didn’t happen over Christmas-New Year.
Some analysts claim that was due to the more confident tone in markets, but that ignores the changed view of the Australian dollar offshore. In fact, the dollar was marginally higher at $US1.0320 on Saturday in New York, compared with the $US1.0256 finish in Sydney on December 1. It had eased to just under $US1.03 in early Asian trading this morning. In the same time the Aussie dollar has risen to a series of all time highs against the euro, topping 81 euro cents last week.
If the dollar had followed previous patterns, it would be eased against the stronger greenback, but still risen against the much weaker euro. But that didn’t happen.
The dollar’s attractiveness will have only increased following last week’s Black Friday, which saw the continent’s 2011 woes dragged back from their Christmas holidays courtesy of Standard & Poor’s downgrades of nine eurozone economies, including AAA-rated France and Austria. That means Australia is now just one of 14 AAA-rated economies around the world.
That coincided with more bad news from Greece over stalled negotiations to implement one of the litany of summit deals from 2011, involving the extent of the haircut private debt holders will take for the Greeks. Greece is now on track — well, more on track — for default: it has to redeem a 14.4 billion euro bond on March 20. If default happens, the investors and others will charge into safe currencies, led by the US dollar, and eventually including the Aussie dollar.
Even if Greece manages to finance the redemption and a deal is done, there are plenty of other opportunities for problems to emerge after last Friday’s string of downgrades, which have effectively reduced the firepower of bailout funds like the European Stability Fund, which will find it harder to raise money and maintain a AAA rating without huge new contributions from Germany.
Adding to the strength of the dollar has been the re-emergence of the euro carry trade as a new whiz for yield hungry investors (it used to be the yen carry trade) looking to move out of euros. Investors borrow in low cost (1% or less) euros and invest into higher yielding assets in Australia. On top of this, central banks and other big investors have been moving out of euros and the US and into other currencies, such as the Aussie and the Canadian dollars as they seek greater diversity for their reserves and assets.
Our dollar is now viewed increasingly by investors offshore as a haven of value, hence the sharp fall in market interest rates here in the past eight months.
The strong dollar will allow the RBA further room to cut rates if problems in Greece intensify, or China slows. We find out tomorrow about Chinese fourth quarter and 2011 economic growth, plus data on production, retail sales and urban investment, but Chinese steel production is now running at its lowest level for more than a year and won’t pick up until much later in 2012.
But for sectors like manufacturing, retail and tourism, the dollar is now the 800 pound gorilla in the back of the economy, waiting to wreak havoc on the weak, the lame and the out of touch in business and help those nimble enough to adjust. Australian businesses have traditionally played the weak dollar for all its worth, as have governments. It has protected the inefficient and allowed exporters of all sizes to make easy gains in sending goods offshore, regardless of whether they were being produced here at a profit (think cars). Now that is no longer the easy way out.
That applies to governments, too. By sending a competitive shock through the trade-exposed economy and curbing growth in big-employing sectors like retail and manufacturing, the dollar will curb tax revenues. While the miners and the banks will continue to produce super profits, other sectors will underperform as revenue raisers, putting further pressure on the budget and on politicians to keep spending down. It also means that our budget will become even more reliant on pro-cyclical sectors, a problem that began developing as a result of the mining boom and the Howard government’s personal tax cuts and which Wayne Swan had to wear when the GFC-induced slowdown ripped tens of billions from his budgets.
Moreover, the revenue challenge is already flowing through to state governments courtesy of lower tax revenue and lower GST payments.
There’ll be plenty of opposition politicians at both levels ready to declare that it’s all the fault of governments, but it’s only another variation of the restructuring impact that the dollar is having on the economy. Foreign investors have ensured that the days when Australian governments could afford to ignore hard budget decisions are over — not because they’ve turned against us, but because they like us too much.
“[A lower dollar] has protected the inefficient and allowed exporters of all sizes to make easy gains in sending goods offshore, regardless of whether they were being produced here at a profit (think cars). ”
That’s a really stupid and ugly way of putting it. inferring that the dollar should have always been higher and those lazy slack manufacturers were lying back sunning themselves with their high wages and high profits.
@Wilful: Ugly, but with distinct aspects of truth. The car industry has always liked to be carried.
And we’re now heading toward parity with the Euro. How times are changing. Expect more wailing from the bricks-and-mortar retailers from lost sales to online stores.
Australia is one of the last countries standing in a game of musical financal chairs.
As Adam Schwab has pointed out many times on crikeyour real estate boom hasn’t gone bust yet.
Overseas investors know this, they have the added bonus of a recent commodities boom.
As America and Europe decend into more debt, more investors will seek to put their money somewhere safe pushing our dollar even higher.
Like our unrealistic and totaly bloated real estate market, the dollar too will become bloated and eventually a bubble in our own currency will be created.
Both will burst at some point, and it wont be pretty.
But at least the manufacturers will be happy again.
I wonder what Keane and Dyer will write when that comes about
The dynamic bimbos are back with another installment of their voodoo economics. This time it’s a double barrel attack on the modern era of exporters. The ones that spent the last 20-30 years building secondary and tertiary export businesses that were able to pay high salaries domestically and still compete internationally via a low dollar.
So just how did businesses like mine respond to an appreciating dollar over the past 4 years.
Firstly they stopped hiring, secondly they stopped increasing salaries, thirdly they reduced work hours, and then they started laying off workers or simply not replacing them when they left.
In 2007, my business had monthly revenues of over 24,000 Australian dollars (16-18K US). In early 2009 this collapsed to 12000 Aussie or 7000 US.
To survive we simply put an axe through spending like there was no tomorrow. From a work force of 2 fulltime workers and 3 part time we now operate with 2 part time workers and my wife has gone back to work in a nice comfy public service job.
As the US advertising market recovered we have steadily rebuilt US dollar revenues to somewhere around 12000-14000 a month. Once upon a time that would have translated into boom times. But with the dollar above parity it’s meant a very hard four years of treading water and managing cash flow on a daily basis.
Now with talk of 1.10 again on the horizon we are looking at offshoring our human based data warehousing processes to either India or the Philippines, and reducing the workforce to one part timer.
For me this has worked out reasonably ok. But too bad for whoever was benefiting from that extra employment or extra spending.
And we are just a small micro business. For companies that are 10-100 times larger in revenue terms – the outlook is frightening. Many of these companies employ high end knowledge workers on salaries over 150-200K – these workers have major commitments that when terminated will flow through the economy like a plague.
The implications of the over valued dollar are a generational disaster in the making. We are going back to the 1960s when the Australian export economy was a quarry and a farm. Meanwhile Information Technology is going to lay waste to the white collar services sector. Industries that once needed 10 people in a department will only two and the jobs will be gone – some overseas to India and the Philippines – but many will simply be replaced by a software robot.
There is no national plan to manage this transition to a higher value dollar. National industry policy is still working on the basis of transforming our export economy into a growth sector of the overall economy. But that was 15 years ago, and just when the full success of that policy was being realised the exchange rate was allowed to blow out and all we get on the analysis side is the voodoo economics from the likes of Dyer, Keane, Gittins, Pascoe and that clown running the RBA and his mate at Treasury.
The Australian Forex market is being gamed by central banks and others. And there is not a single other OECD nation in the world that would tolerate what is going on. Instead we roll over and say there is nothing we can do – we’re a free and open economy. And so what if no one else plays by the free market rules, as I’ve spent my entire career promoting neoliberalism and I can’t recant at this stage of my career.
Australia’s export sector is not Ford and Holden, it’s actually made up of thousands of SMEs that spent the last 20-30 years transforming the Australian economy in ways that most people have really no idea about. Dyer and Keane are simply two aging white middle class males in total denial as to what is actually going on.
The Euro banks would surely not be so ungrateful having just had 500 billion Euros loaned to them at 1% that they could not loan it on at say 3% , write off half the Greek debt , and still make a profit and pay bonuses ? It’s nice work …sort of puts a little rent seeking in perspective.