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EYE-BALL Guru on – The Value of the A$ – a report from ‘The Australian’s’ David Uren-

August 15, 2012
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Latest GURU Posts:


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Media Economic Commentary on June 2012 Retail Sales Figures – just naive …


Aug 2nd:

- The Rise of the Australian $ – Finally someone from Academia Land agrees -


July 30th:

- Greece – - 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:

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Title:
- The Value of the A$  -
- a report from ‘The Australian’s’ David Uren -
| Author: EYE-BALL Guru |15th Aug 2012 |
The story in The Australian today with the heading – ‘Don’t Intervene to cap dollar’ – was interesting reading.  It is copied below:

Don’t intervene to cap dollar


| Author: David Uren, Economics Editor | Date: Aug 15th 2012 | Link to On-Line Story. |

PROTECTION from the wild forces of global finance sounds appealing when the full sweep of Australia’s export industry is being belted by the strength of the currency.

The 10 per cent rise in the value of the Australian dollar in the past two months is not like the climb over the previous two years, which accompanied soaring prices for our principal export commodities. Now, the currency is rising at a time when commodity prices are in free-fall. Iron ore prices are at their lowest since the peak of the global financial crisis and are still falling, as are coal prices.

The Reserve Bank has flagged its concern that the elevated currency may cause greater long-term damage to the economy than expected.

Blame for the strength of the Australian dollar is being pinned squarely on the world’s central banks, which are snapping up the Gillard government’s 10-year bonds even faster than she can issue them. Morgan Stanley chief economist Gerard Minack says foreign investors have bought $62 billion of Australian government bonds over the past 12 months, about 50 per cent more than the deficit required.

Their appeal is easy to understand. Not only are we in a minuscule group of eight countries with a AAA rating from all credit agencies, but almost alone among them, investors in Australian government bonds still get a measurable interest return.

In Denmark and a number of other AAA-rated countries, bond yields have gone negative. It is hard to get your head around a negative interest rate, but it means that buyers of Danish bonds pay its government to look after their money.

Influential voices, among them two former Reserve Bank directors and eminent economists, Warwick McKibbin and Adrian Pagan, have called on the Reserve Bank to intervene in the foreign exchange market and cap the rise in the currency.

The Reserve Bank has done so three times before, and realised fat profits on each occasion. Economists point to the apparent success that the Swiss central bank is having in setting a ceiling on the value of the Swiss franc. It has told markets it will stand in the market and issue Swiss francs to anyone who wants them, to stop demand for the currency pushing its value above E1.2.

However, the Swiss National Bank has taken a dangerous gamble that will wreak havoc with its national finances if, as is all too possible, it goes wrong.

Before the Reserve Bank decided to intervene actively in the market, selling Australian dollars to foreign investors to cap the rise, it would have to be confident that its intervention would be successful and that the gains would be worth the considerable risk.

At the moment it is a non-starter, as the Reserve Bank would be taking on liabilities on which it would have to pay its cash rate of 3.5 per cent while buying foreign assets, where the interest rate is little more than zero. This would be hugely expensive.

Interest rates in Switzerland, by contrast, are already at zero and it is facing deflation. Any return it gets from buying foreign assets, such as the Australian dollar bonds its central bank has been mopping up, earns it a profit.

When the Swiss National Bank first started intervening to stop the rise of its currency, it was a disaster. Its purchases were not enough and the Swiss franc kept appreciating, leaving the central bank nursing losses equivalent to $20 billion.

Since declaring last year that it would print as much money as needed to cap the rise, the Swiss National Bank has accumulated massive reserves of foreign exchange, reaching the equivalent of $400bn. These reserves now stand at 70 per cent of its gross domestic product.

The risk for Switzerland is that if the euro crisis deteriorates, with Greece defaulting, banks failing and the solvency of Spain and Italy called into question, the euro will need to devalue against all currencies, including the Swiss franc. A 10 per cent devaluation of the euro against the Swiss franc would result in its central bank nursing losses equivalent to 7 per cent of GDP.

Translate that to Australia, and you would be looking at losses for the Reserve Bank in the region of $100bn. The bank, at its last accounts, had total capital and reserves of just $5bn.

Any credible intervention in the currency market would have to be huge. The size of the foreign exchange market has mushroomed since the Reserve Bank last intervened to defend its view that markets had the value of the currency wrong. In 2001, when the Reserve Bank spent about $4bn buying the Australian dollar as it slid to just US48c, the Australian dollar had a daily turnover on global markets of about $50bn. Daily turnover is now in excess of $250bn (about a third more than for the Swiss franc), so any commitment to defend the currency would have to be much larger.

The extent to which foreign central bank purchases are pushing up the value of the Australian dollar is, in any event, debatable.

Central banks are buying Australian bonds, mostly from Australian financial institutions, which wind up with higher deposits. As a result they have less need to borrow from abroad. The source of capital inflow has changed, but not necessarily the amount.

However, it is likely that the disturbed state of the global economy will result in further upward pressure on the currency. Central banks in the US, Europe, Japan and Britain have attempted to get their economies moving by printing money — about $4 trillion in total — to buy their own government bonds and support their banks. Much of that cash has wound up in global markets, with some flowing to the Australian dollar.

With the world economy softening, more of this support is expected. These are giant forces unleashed in extraordinary economic times. The central bank of any mid-sized economy would take a stand against them at its peril.

If the Reserve Bank does come to the view that the currency’s value is at odds with the fundamentals of the economy and is damaging business, the obvious step is to cut interest rates. For the moment, it shows no sign of believing this is required.

…read more on-line …

Comments:

The story is about whether the RBA intervenes in the currency markets to ‘cap’ the A$ … it canvases past history and the growth of the A$ market in Global FX trading.   It highlights the risk involved when Central Banks try to protect currency value and what might happen if it fails.

But what the author David Uren does not tell you is what the cost will be if the A$ is not returned to its medium term average of around $0.75c.  He does understand nor tell you about the A$100′s of billions already lost in A$ trade revenue over the past 8 or so years – up to as much as A$700 billion.   He also does not tell you about how the off-shore investors, including other Central Banks investing in A$ assets,  are doing so with hardly no risk of any currency slide.

It is not just the interest rate differential the investors enjoy – it is the currency appreciation and the capital gain contained within that position.  The A$ fell sharply from parity to A$0.60c after the early 2009 GFC impact on global equity markets.  Investors all over the world believed the ‘commodity trade’ was done.  That is where the demand for minerals underpins the exporters currency.  But as the GFC settled these same off-shore investors came back with a vengeance and again bought the currency.   See chart action below:

The $A v $US 15 year chart … [Please click on any or all charts to enlarge in a new window.]

Either Uren does not understand the ‘currency’ trade ,or he just does not understand that he does not understand.   With the RBA continually talking inaction on interest rates against a global marketplace where Central Banks were offering 0% interest rates – the RBA held firm with rates above 4%.  The Australian Mortgage sector have paid an expensive price for ‘numskull’ RBA policies and a Government who just don’t get global markets.

There are many things a Central Bank or a Government can do to protect a currency.   The decision to let the rest of the world rape and pillage our wealth whilst standing at the gate and welcoming these off-shore players is the biggest dumbest play by any Government in the world.  And to cap it off – they awarded Wayne Swan the ‘Treasurer of the Year’ award just so he would not close down the windows of opportunity on offer.

For 20+ years China has pegged its currency to the US$ – and as the US$ has slid in value against all its major trading partners – China has reaped a gargantuan windfall for its exports and domestic growth.  i.e. as the US$ has weakened on global markets – China’s Renminbi export receipts have grown as Australia’s have shrunk in A$ terms.  A chart showing the US$ index over the last 15 years clearly highlights this – see below:

US$ Index 15 years: [Please click on any or all charts to enlarge in a new window.]

For the first 10 years of that equation – the rest of the world felt China deserved to be allowed to grow its economy and contribute to the world economy and supported the currency peg.   In the last 10 years the rest of the world has suffered immensely because of the peg.  Efforts to have China uncouple both their currency ped as the reason for prosperity, and the huge advantage it enjoys over every other Nation as a result – has seen diplomacy fail and fail miserably.

Australia is a smaller player in the global trade market – but the world loves our commodities, both mining and agriculture.  Our miners and farmers have forgone $100′s billions of trade revenue over the last eight or so years – all because of the high A$ policy, with no compensation offers to counter their loss of A$ revenue.  To give you some idea in mineral pricing in A$ and US$ terms, Iron Ore and Coal charts are presented to show first pricing moves over time, and then how those price moves are reflected in A$ terms.

Coal Price in US$ terms over 30+yrs … [Please click on any or all charts to enlarge in a new window.]

Coal Price in A$ terms over 6yrs … [Please click on any or all charts to enlarge in a new window.]

Iron Ore US$ 30+yrs… [Please click on any or all charts to enlarge in a new window.]

Sorry – could not find a comparative A$ chart for Iron Ore prices.

Copper US$ 20+yrs … [Please click on any or all charts to enlarge in a new window.]

Copper A$ 12yrs … [Please click on any or all charts to enlarge in a new window.]

The thing to look for in these charts is the peak and bottoms – in US$ prices they spike upwards – in A$ terms they tend to flatline … thus indicating the reduced A$ cash flow for our minerals.  The overall trend can best be seen in the CRB Index -

CRB Index (US$) … [Please click on any or all charts to enlarge in a new window.]

Since the 2009 GFC selloff – this market has recovered .618 of the spike down, and another .618 of the spike upwards.  These double Fibonacci numbers give insight to the ongoing correction of the original spike down in mid 2009.  A break of the upper trend line on the above chart would indicate more corrective action, whereas a spike down below the July 2012 lows and the rising trend line would indicate lower levels, and quite possibly a retest of the mid 2009 levels.

The Australian Government – both during Howard’s term, and in the current Rudd/Gillard era have not grasp nor understood what has been happening as a result of the high A$ value.  The RBA has equally been asleep at the wheel.   A few weeks ago Guru did a post on ex RBA Board member Prof McKibbin’s comments about the rising A$ – read them here – his comments are 10 years too late.

As a Financial Editor – Uren either needs to knowledge up on his understanding of the real cost of the high A$ policy – or pass the baton to someone who can expose the stupidity of the current ‘RBA mandate’ – read here – This Mandate is far to simplistic for the complexities of Global investment and trade.   This ‘Mandate’ is agreed to by both sides of Politics – in that ‘inflation’ and ‘interest rates’ are the tools used for the management of our economy.

25 years ago this might have been the case – but with 10 year bond yields in the high teen’s at the time, and inflation in double-digit numbers – ‘the above mandate’ was formulated.   Since the early 90′s, 10 year bond yields have remained under 10% – and been as low as 4% – inflation has remained in a band of 2-3%.

With the GFC now entering its 5th year – surely someone should tap the RBA on the shoulder and tell them that they need a new mandate.

Treasurer Swan, and Opposition Spokesperson Joe Hockey are dumbfucks on matters of economic reality.  Swan heralds a ‘pipeline’ of investment in excess of $500 billion – it will never happen with the A$ at these levels.  Hockey is just so out of his depth that he just swoons and says – ‘it’s all to hard’ to understand.  As such he just does not talk about the A$ value.

Uren should know better with the title he writes under.


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. August 15, 2012 at 2:35 pm | #1

    The flip side of a falling currency is ‘capital outflow’ – Uren’s $52 billion of 10yd bonds held offshore would be sold if the currency went into a fre fall as it did in 2009 – equity markets would also be crushed – and the Banks would be hammered because their deposit rates would have to go up to attract the funds back into the country, or look to compete with other domestic Banks for funds.

    It’s not a simple issue – The RBA has been far too cautious … Interest rates should have been softened a long time ago – but other measures like export tarrifs, and import loadings, a currency loading, and many other options are available if they are serious.

    Australian industry will not recover in any shortterm offering – with Brazil and Africian minerals markets set to come on line soon – China will look elsewhere for their resources becasue of the high A$ – natural events will then depreciate our currency but under those circumstances – many more jobs will be lost.

    Swan and Costell have a lot to answer for – and political ignorance always has a price … so far it is almost A$1 trillion over the last 10 years … in 1983 floating the A$ was the right thing to do – but it has served its purpose and the global markets ahve changed. A new way of thinking is needed and sadly – our way of doing things is trapped in a 1990′s thought process.

  2. August 15, 2012 at 2:40 pm | #2

    On the US$ Index chart – its relevant to point out that the fall from 2001 to 2008 was all George Bush Jnr … i.e. Bush was such a poor President that the world sold the US$ as a response all during his term.

    The positive in that is that the US is now cheap to the rest of the world – you could do a lot worse than buy US$ assets at the moment.

  3. Lizette Minson
    October 2, 2012 at 10:21 pm | #3

    This actually answered my downside, thank you!

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