Home > Politics - International, The EYE-BALL FMZ - [Financial Markets Zone ], The EYE-BALL GURU > EYE-BALL Guru on – The Rise of the Australian $ – Finally someone from Academia Land agrees –

EYE-BALL Guru on – The Rise of the Australian $ – Finally someone from Academia Land agrees –

August 2, 2012
Latest GURU Posts:

July 30th:

– Should they be allowed to leave the Eurozone –

July 27th:

Superannuation – a great big rip-off – Part III!!!

July 19th:

The “LIBOR” Scandal …Part III – Banks a conduit for crime and corruption!!!

July 14th:

Link to Part IIThe LIBOR Scandal … The Banks are in Trouble … again!!!

July 8th:

Link to Part IThe LIBOR Scandal … about to explode …

July 7th:

The “CARBON v CLIMATE CHANGE” Debate – Part I – OIL and its Contribution –

June 15th:

The GFC – the right of reply … the right to question …

June 8th:

A Global Economic Snapshot …

June 6th:

Treasurer SWAN just won Lotto …

May 29th:

Greek Investors re-engage in Equity Market …

May 28th:

An example of a Government truly concerned about Currency appreciation …

May 28th:

Greeks flip over Lagarde’s – ‘pay your taxes’ gibe …

May 24th:

The FACEBOOK (FB) Float:

April 29th:

Joe Hockey’s misfires on Welfare – he should be made to serve a lifetime on welfare existence …

Mar 14th:

US Bank Stress Tests – The Cover-Up and bullshit continues …

Feb 12th:

The Continuing Cost of the High Value A$ …

Dec 23rd 2011:

An Open Letter to German Chancellor ANGELA MERKEL
– None Better …

To see more GURU posts:

click here …

– The Rise of the Australian $ –
– Finally someone from Academia Land agrees –
| Author: EYE-BALL Guru | 2nd Aug 2012 |
Fwell over 12 months now – the Eye-Ball Guru has been attaching Treasurer Swan and the RBA Governor Glenn Stevens over their ‘head in the sand’ position on the value of the high A$ and its impact across all of Australia’s Industry sectors.

Today Professor Warwick McKibbin – former RBA Board Member – came out and made comments about the RBA policy toward the high A$.  His comments are being reported in the Financial Review – and other publications.  Blogland has also picked up on the story and Macro Business wrote an article as well.

The A$ chart v Iron Ore price below – copied from the Macro Business story – [click to enlarge in a new window] is history from 2008-2012.

Knucklehead economists and financial journalists should have been on this story a very long time ago – even before the 2008 period.

As mentioned in previous GURU posts – the average value of the A$v$US since it was floated in 1983 is just on A$0.75c.   During the GFC sell-down the A$ fell to A$0.60c in late 2008.  This was from highs of parity with the SU$ only two months previously.

The sell-down was the ‘resources’ trade being unwound by global investors.  Six months later the same trade went back on and nobody in the Australian marketplace showed any concern.  This saw the A$ rise again and nobody was prepared to stand in its way.

A low A$ means –

  • competitive industry with the rest of the world,
  • attractive destination for overseas tourists,
  • makes overseas holidays more expensive,
  • increases the A$ earn for all our export industries, i.e. mining, agriculture, and the like,
  • attracts overseas investment.

On this last point – the $500 billion of infrastructure spend Treasurer Swan keeps referring to is his own form of pipe smoking – it will never happen whilst the A$ is at these levels.

A high A$ means –

  • Overseas holidays are cheaper,
  • on-line buying from offshore is cheaper,
  • Australians lose jobs because Australian business’ can’t compete with offshore producers,
  • mining and other export receipts are much lower in A$ terms,
  • Imports are cheaper and threaten domestic producers, and
  • the list goes on forever.

Brazil and Africa have spent billions getting their infrastructure up and running with aid from China looking for cheaper markets.  When they do come on stream – Australia’s mining exports will look very expensive.

The fact that it has taken this long for someone with a market reputation to come out and speak this type of language means so much.  McKibbin sat on the RBA and left there 2 years ago.  If it took him two years to get out of the RBA way of thinking – no bloody wonder those currently in the job have no idea.

Read the Financial Review story on McKibbin’s comments here:

McKibbin urges RBA to tame $A

| Author: Joanna Heath | Date: Aug 2nd 2012 | Link to On-Line Story. |

Click on image to enlarge in a new window.

Former Reserve Bank of Australia board member Warwick McKibbin is urging the central bank to intervene in currency markets to limit the strength of the dollar, suggesting that ‘safe haven’ demand from foreign central banks is artificially driving it higher even as commodity export prices fall.

An intervention by the Reserve Bank could create the perception Australia was joining the global “currency wars”.

Switzerland pegged its franc at 1.20 per euro after investors seeking a haven from the European debt crisis drove it to record highs.

The Reserve Bank has been very reluctant to enter the market to influence the price of the dollar. The currency this week traded at a four-month high of $US1.055 and a record €0.8588, after touching a record high earlier this year on a trade-weighted basis, at 78.6 index points.

“The logic is that foreigners want to hold more of our currency – they’re not wanting to buy more of our goods, they want to just hold more of our currency,” Professor McKibbin told The Australian Financial Review.

“So the optimal response is just to supply them with more of our currency and not to let that affect the economy. If you don’t supply them with more currency, then they will still buy more which will drive up exchange rates and then that will be changing relative prices in the Australian economy, which you don’t want to change.”

Professor McKibbin said the disconnect between falling commodity prices and a rising Australian dollar suggested the weight of central bank buying was playing a role in propping up the currency. Mr McKibbin’s comments come during a week of further bad news for the local manufacturing industry, with news car maker Ford could exit local production by 2016. The manufacturing industry has complained that the loss of competitiveness with importers due to the strong Australian dollar is resulting in lower profits and job losses.A number of global central banks have recently been revealed as buyers of Australian dollars and Australian dollar denominated assets such as bonds, attracted to the currency as a safe haven from economic troubles in Europe and the US. Russia, Germany, Switzerland, Kazakhstan, the Czech Republic and Vietnam are all understood to be snapping up the Australian dollar whenever it suffers temporary dips.

The United States Federal Reserve was expected to make clear on Wednesday night its intentions on further quantitative easing measures at the conclusion of its Jackson Hole conference, while the European Central Bank meets tonight. The devaluation of the US dollar and euro kick-started the trend toward investing in new reserve currencies such as the Australian dollar.

The Chinese State Administration of Foreign Exchange, which controls the world’s largest foreign exchange reserve, has also reportedly been in Australia recently meeting state government authorities to discuss bond buying.

“There are all sorts of reasons why the currency is strong – it’s stronger than you think because commodity prices have come off quite a lot and it’s stayed up around $US1.05,” Professor McKibbin said .

“I think a fair bit of that is a port­folio shift on top of declining commodity prices.

“When a portfolio shift into Australian currency is observed, the exchange rate change should be completely offset so the shock only affects the money markets rather than the real economy. If the shock cannot be observed precisely then the central bank should ‘lean against the wind’, that is intervene to slow down the extent of appreciation of the exchange rate.”

Philip Lowe, deputy governor of the RBA, hinted in a speech in July that foreign inflows into the currency markets were being closely watched.

“At least where the currency is at the moment, I think it’s hard to make a strong case that it’s fundamentally overvalued,” Mr Lowe said.

“But if these flows of capital continue to come in for purely financial reasons, we could face the issue where the currency is high for purely financial reasons, and not because of the fundamentals of the under­lying economy.”

According to sources, the Australian dollar has not yet breached the RBA’s definition of fair value but is close to the upper limit at its current levels.

An intervention by the RBA to bring down the value of the currency would be the first since 1992. The bank regularly participates in foreign exchange transactions to cover government positions, and made large interventions in the early 1980s to push up the value of the currency, prompting accusations of a “dirty float”. The most recent intervention to hold up the Australian dollar was during the global financial crisis in 2008.

Other economists said an intervention by the RBA would be a dramatic move, and questioned the wisdom of such a proposal.

“It would require the RBA to bet its judgment against the collective judgments of a large number of its peers around the world in terms of what the value of the Australian dollar ought to be,” Merrill Lynch chief economist Saul Eslake said.

“It would be the RBA taking on a veritable panoply of other central banks. While in theory the RBA has a limitless capacity to create Australian dollars to meet the demand from central banks around the world, I’m not sure at the end of the day that’s a battle the RBA would ever be keen to join.”

HSBC chief economist Paul Bloxham, an ex-employee of the RBA, said it would be difficult to determine whether the Australian dollar was in overvalued territory.

“It’s not part of the standard set of tools the RBA uses as part of the monetary transmission mechanism, but in an extraordinary event . . . you could consider using that approach to contain the strength of the Australian dollar. I don’t think we’re there yet,” Mr Bloxham said.

Central banks around the world have become more active in recent years in defending the value of their currencies against so-called “overvaluation”. Brazil has been the most vocal, declaring a “currency war” in 2010 against speculative money flooding into the exporter nation, raising the real to punishing levels.

More recently, the Swiss National Bank declared a “floor” for the Swiss franc of Sfr1.20 per euro after its value skyrocketed thanks to the European sovereign debt crisis. That intervention has seen the size of the Swiss foreign exchange reserves balloon to 303.8 billion Swiss francs, prompting questions over whether the central bank can afford to maintain its intervention program.

Professor McKibbin said he was aware staging an intervention in the Australian dollar was risky.

“If you think it’s a portfolio shift and you provide the extra money you’ve done exactly the right thing, but if you think it’s a portfolio shift and it turns out it was actually a demand shift, then you’ve done exactly the wrong thing,” he said. “It’s highly dangerous. If they get it right then there should be no effects on the economy at all, except Australia would be earning extra income off the reserves. But if it turns out we’ve got it wrong we could actually damage the economy.”

The intervention could be done without a major impact on inflation and the printed money would not need to be “sterilised,” or offset by selling Australian bonds, he said.

Blind FREDDY knew what was happening to the Tourism industry five years ago. Fact is the RBA only has a mandate that targets inflation and the only way Glenn Stevens knows how to mandate that charter is by using Interest Rates. Overseas investors have siphoned off Billions of A$ wealth taking advantage of the RBA’s and Swan dumbass ‘head in the sand’ stance on Interest Rate policy through this GFC period.

Finally we might now see some movement at the station – it will be too late of course and a generation of Australians will pay the price for Treasurer Swan and the RBA’s Glen Stevens clusterfuck on the high A$ policy and stand.

Have your say where it counts: – contact your Local Federal Representative via the links below and let them know how you feel about this, or any other topic that you feel strongly about – or you can just post a comment below and let off some steam.

The EYE-BALL Guru …

  1. david the pragmatist
    August 3, 2012 at 12:18 pm

    How would you like those economists from Merrills and HSBC making decisions for your business. These guys who have been around quite a while and should know better but what they show is that they are nothing but number crunchers who would not know an initiative from an asshole!

    Back to the subject at hand, you are spot on, do not these morons understand that DEFLATION not inflation is the enemy. If ever an economy could do with some, the world as well for that matter, it is NOW!

    This said you could drop interest rates yes, but better still put a witholding tax on non trade transactions. That means that financial transactions can be taxed at 10% on their A$ earnings. It would have an immediate effect of knocking off the A$ without the RBA spending a cent. IF they (RBA) want to give a kick a long in the process, then that would be a good idea as well. A bit of stimulation to coincide with an A$ fall would also be an initiative these blokes could add to the mix!

    Where are these loonies as Australia loses jobs (seeing Manufacturing, tourism and even small business consumption) while these talking head economists agree with each other and collectively put themselves into an environment where they are judged as a group (incompetent) and keep their jobs, because none of the silly bastards want to show initiative.

    If the RBA does not understand this, where do we stand? answer “F*****d”.
    Our moronic Treasurer is off playing Bruce Sprinstein, i wonder if he realises that his legacy will be “the worst Treasurer in Australian history” base on his absolute ingorance of what is happening to our economy. Question to Mr Swan, what have you ever created?

    Please note I have seen nothing from the opposition parties to suggest they understand the $A issues either.
    Is there anyone out there that can scream loud enough to have these issues understood.

    Peter Finch, where are you when we need you!

  2. Josh
    August 19, 2012 at 7:12 pm

    Greate post. Keep posting such kind of information on your site.
    Im really impressed by your blog.
    Hello there, You have performed an incredible job. I will certainly digg it and individually suggest to my friends. I’m sure they will be benefited from this website.

  1. No trackbacks yet.
Comments are closed.
%d bloggers like this: