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Wednesday's FX : Whopping Wallaby
We continue our holiday journey across the globe in our currency series and decided to take a stop down under. Now this is an interesting stop for many reasons. The Australian economy has since 2009 being put forward as an example of a bullet proof economy when it comes to sailing through this global financial crisis. Impeccable credit rating status with AAA and CDS world ranking no7 @ 67. But we came across some bubble stories and decided to check for ourselves.
A first observation is that the country housing market is still firing on all cylinders, today even a reason why the central bank no longer is inclined to cut interest rates (http://www.economist.com/blogs/freeexchange/2011/03/global_house_prices). But also some other observers seem to be worried about the 2 speed economy. First a boom in mining, now the service and housing/sector for which the sky seems to be the limit. And yes, we have to admit that the public leverage is very limited in terms of deficits and debt, concerning the private sector however we have a different story. And don't forget that Australian banks are to a significant extend dependent on foreign funding as well.
But how has the Aussie $ fared until now ? Well, let's have a look at the evolution against USD and EUR. First chart shows you the AUD calculated in USD (chart goes up AUD goes up), the second chart shows the amount of AUD required for 1 EUR (chart goes down, AUD goes up)
AUD Evolution against USD '99-'12 : low of 0,50 (2 AUD for 1 USD) in 2001, 1,10 in 2011 and now 1,05, meaning the AUD still above USD parity.
Evolution against EUR '99-'12 : On average 1,60 AUD per EUR, above 2 in 2008 with carry trade reversals and now pushing towards 1,15.
It says something already but not enough. After all, Australia does business with other parts of the world besides Europe and the US (commodity hungry China to mention one). So let's have a look at how the real effective exchange rate has behaved over the same period. This takes both trading partners weight into account and inflation differentials (if your inflation momentum runs lower than your trading partner's one, it doesn't matter that much whether you appreciate in exchange rate). And here we have the following result :
JP Morgan real effective exchange rate index for AUD '99-'12
Starting at +/- 100 in 1999, reaching 92 in 2001 and then peaking in 2011 @161, presently @154
So it seems we have a clear case of Dutch disease on our hands with an exchange rate appreciating by more than 50% over the past decade. Now some might say : suppose the AUD was largely undervalued some 10 years ago, no problem with today's level then ? Well, let's turn back then to the real world, meaning every day's shopping, food and drink etc. We came across the following quote in a Blog article and it is confirmed by the OECD PPP database on USD. And hence it seems that though Skippy is still jumping around, he might very soon be overstretching things :
"So we'll take someone else's opinion. A top chef at a top Sydney restaurant reckons breakfast for 2 in the city evaporates at least 2 20$ notes from his wallet. In his native New York, he reckons the same money would feed 4 people."
25 Comments
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Philippe
On 1 Aug, 2012
What I find interesting is that, in pure fiat systems, prices always adjust asymetrically to FX variations. If prices in AUD had gone down, one could have concluded that the AUD had in fact been re-evalued. But they obviously haven't. Add to this that prices in Oceania are higher due to the relative cost of transport ( understandable for imported physical goods, less so for digital downloads , but observable for both ).
Also interesting is the intellectual bias we have considering that the appreciation of a currency is economically destructive. But what if what we observe for the AUD was actually a sign of how much price adjustment is still to come for us and our anglo-saxon friends, in order words how much inflation we managed to neutralize ( in the the case of the USA, to export ). Simply said, what if this simply meant that prices in Europe, UK and USA had to double to adjust to what our currency is actually worth ?
By the way, observe too that SGD, THB and others are also at high levels compared to the EUR -
christof Govaerts
On 1 Aug, 2012
@Philippe
Aha, a very , very clever remark and the essence of carry trades : investors always look at the positive interest carry regardless the relative inflation differential in the advantage of the currency ; in fact, as is the case here, the inflation differential is in the disadvantage of the currency you are investing in : and that my friend is how bubbles are being blown and how bubbles pop in the end
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Nacht Und Nebel
On 1 Aug, 2012
Not all can be explained by carry trade.The 10 year Thai bund is about 3.2 percent far below the average of every EU country.Perhaps one has to pays for the lower asian deficits too and for the private growth over there..But your right Mathilda bonds are not a good idea.
The strength of the asian curriencies or is it the weakness of the western currencies.No I will not be against Asia.Betting against Asia is hoping that for the European dino"s rebirth.
Why do we always think that Asia can't survive without Europa in the long haul?In reality they even don't like us at all.Asians always back the winner they hate losers so they never loved us but they hate us now :) So I think that the strength in asian currencies can be explained by asian selling of the euros .-
christof Govaerts
On 1 Aug, 2012
Dear NuN
I don't question your optimism on Asia in the very, very long run ; but it's not that you are destined for prime time that you can take the leading role hic et nunc. Decoupling, no way josé !! Just read the stories of today on Korea (very good barometer for what is going on in Asia) and the fact that China has registered a current account deficit in Q2, the first time since1998 : still a very long way to go-
Nacht Und Nebel
On 1 Aug, 2012
Christof,
The fact that we have falling in love with a different girlfriends unables us to be friends forvever:).
Asia-Pacific millionaires outnumbered those in North America for the first time last year, according to a June report by Capgemini and RBC Wealth Management. The number of people with at least $1 million in investable assets in the region climbed 1.6 percent in 2011 to 3.37 million, while high-net- worth individuals in North America dropped by 1.1 percent to 3.35 million, they said.
http://www.bloomberg.com/news/2012-07-31/asian-millionaires-firing-bankers-take-control-of-wealth.html-
Nacht Und Nebel
On 1 Aug, 2012
But at least we did not disagree on the fact that we did not understand how the NBB said that Belchium was the only booming economy in the EU in the coming year.:)
Who will the Rim beaux of the timely newspeak blame now?
I bet it will the germans again :)-
christof Govaerts
On 1 Aug, 2012
@NuN
Even the best student of the class can miss an exam :-) So that 94 mio eur budget control was a dress rehersal I presume. On the other hand, the Treasury finally got sense and managed to tap 10 and 14 y bonds at very low rates, you got to give them credit for that-
Nacht Und Nebel
On 1 Aug, 2012
On the other hand, the Treasury finally got sense and managed to tap 10 and 14 y bonds at very low rates, you got to give them credit for that.
Did they do that or those who have saved in the past or perhaps we must thank those who no longer invest in spain portugal and greece:)
what is the point of a dress rehersal when the hairy assed empress preferes to wear no clothes?:)-
Nacht Und Nebel
On 1 Aug, 2012
Mochten ze niet met vakantie zijn, de topministers van de regering-Di Rupo zouden het van de daken schreeuwen dat deze evolutie een beloning is voor hun puike werk, onder meer in de begroting. De markten blijken er inderdaad vertrouwen in te hebben dat het beleid van Di Rupo de vruchten afwerpt die vooropgesteld worden. Het is wat dat betreft altijd even afwachten, maar zeker is dat de regering nu minstens het voordeel van de twijfel krijgt.
Fundamenteel is de rente-evolutie waar België kan van genieten echter het gevolg van een steeds radicalere tweedeling in de eurozone. Politici en centrale bankiers zweren bij de eenheid van de eurozone, maar de markten zien dat al enige tijd anders. Die splitsingsvisie zet steeds meer door. Getrokken door Duitsland behoren ook Nederland, Frankrijk en België bij het kopgroepje. We wezen er al eens op dat de Belgische rente opvallend trouw de Franse volgt
http://trends.knack.be/economie/opinie/columns/johan-van-overtveldt/negatieve-rente-voor-belgie-de-tweedeling-in-de-eurozone/opinie-4000155519599.htm?nb-handled=true&utm_medium
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Nacht Und Nebel
On 1 Aug, 2012
http://www.thewealthreport.net/economic-trends/rise-of-the-new-rich.aspx
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christof Govaerts
On 1 Aug, 2012
@NuN
I love it when people can agree to disagree ; but seriously, of course the rise of Asia is undeniable ; and for some strange reason - and I am far from being familiar with the region - I think Asia's trump cards are better than LatAm (though India will always be a mess). But that said, in a world of ever more globalization, decoupling is a paradox to say the least-
Nacht Und Nebel
On 1 Aug, 2012
Christof,
I would not bet on India either.It is all about education I guess.My favorites are Thailand,Indonesia,Vietnam,The Phillies in the medium term. but I could be wrong :)-
christof Govaerts
On 1 Aug, 2012
@NuN
India and the curse of its "kasten" systeem : I think the problem is a high degree of inequality also translated in education with a small part being very educated (English boarding schools, technology and IT) and a vast part of the population being doomed to be losers-
Nacht Und Nebel
On 1 Aug, 2012
Christof,
So true.Weath must be like an ink spot falling into water not like an ink spot falling on a piece of blotting paper.Last time I was in Bangkok I met some Indians.The caste system is a very strange thing indeed.Seeing Indians talk to Indians in english all of the time:)It was also strange to see when I didn't stop for a red traffic light in BKK.The next stopping sign the Indian who was walking along with me must have thought anything you can do I can do better so he stopped a 4 cabs running at 50 km/h..Some cars can stop very fast:)Damn Asians he said to me they have no respect for us :)Some thai cab drivers are like cameleons they can change their skin color from brown to very white in a split second:)
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Philippe
On 1 Aug, 2012
@Christof
If only one could exchange 100 AUD banknotes against 100 AUD coins;-) at face value. The green color of the banknote isn't that tasteful. Nor is the idea to commemorate the Gallipoli disastrous waste of human blood on a banknote. Whereas that coin, with a kangaroo and that yellow color...
Now, I agree with you that investing in AUD denominated bonds now isn't a clever thing to do. And that arbitration from AUD to other currencies should be considered. But moving back to EUR and USD.... this smells sulfur dioxyde. -
christof Govaerts
On 1 Aug, 2012
@Philippe
I am following your stream of consciousness and I also moderate the Bill Gross quote of the US being the least dirty shirt. It is however a very liquid dirty shirt. And it was the first to hit zeo rates, now being followed by the UK and the euro-zone. So when the the carry spread narrows, and certainly in risk-off environment, these 0% funding currencies (including JPY) very often sky rocket ; and then people wonder why the AUD can plummit ; mind you, just check the carry evolultion AUD/JPY and what it did during 2008 : all the carry profits over 5 years were evaporated in 2 days and even more (50% +) : and at that point, you don't want to be short JPY, USD or EUR for that matter
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Jeroen van Rijswijk
On 1 Aug, 2012
Prof Keen, een van de weinige voorspellers van de great financial contraction (GFC) met zijn website Debtwatch: Analysing the Collapse of the Global Debt Bubble, is toch minder enthousiast over de Australische huizenmarkt:
http://www.debtdeflation.com/blogs/2012/05/30/correction-to-what-house-price-falls-really-look-like/
quote:
Even when you consider just the very brief time series that the ABS has assembled, Australia’s bubble dwarfs the American one. Real house prices peaked at 2.6 times the level of 1986, whereas the US market peaked at 1.7 times the 1986 level.
In onderstaand recente interview geeft hij aan dat de tot op heden minder gedaalde Australische huizenprijzen tov Amerika zijns inziens volledig te verklaren is door een later begin van het knappen van de bubbel in Australie (2010) tov VS (2006).
http://www.debtdeflation.com/blogs/2012/07/24/talking-with-peter-switzer/-
christof Govaerts
On 1 Aug, 2012
@Jeroen
Bedankt Jeroen, en naast Australië is Canada even ziek in dit bedje ; de Canadese privé schuld per capita is groter dan in de VS. De wetgeving is iets beter in Canada maar toch ook daar zien we dat het iets te hard is gegaan en dat er inderdaad nog wat lucht uit kan. Toch opvallend dat dit net landen zijn waar de commodity boom over de laatste jaren welig heeft getierd
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Nacht Und Nebel
On 1 Aug, 2012
De wurgende economische crisis in Griekenland treft er nu ook frauderende ambtenaren. De Grieken hebben immers geen geld meer om forse steekpenningen te betalen en dat voelen de corrupte overheidsfunctionarissen aan hun zwarte portemonnee.LOL
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Nacht Und Nebel
On 1 Aug, 2012
Burgernomics:Buns for your buck!
http://www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3 -
Theo
On 2 Aug, 2012
Is Australia really a country? ... or Canada for that matter?
I always think of them as The United States of the Kingdom, or better known as The Common Wealth
http://afr.com/p/national/mckibbin_urges_rba_to_tame_CGGs2yJtrgvGurTQJ9vReN-
Philippe
On 2 Aug, 2012
@Theo
Have you already tried to say that to an Australian ? Or to tell a Scott that haggish is an evidence of the weirdness of English cooking "art" ? I would advise caution if you intend to do so. ( anyway haggish tastes better than it looks )
Just note that QEII is featured on the smallest australian denomination, whereas the highest one commemorates how the UK wasted anzac blood in the Gallipoli failure. That surely tells something
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Theo
On 2 Aug, 2012
@ Philippe
I actually have done so. As well as to "Canadians"
Both places are unmistakably still part of the British Empire. Their Foreign and Monetary /Economic policies are dictated by and serve the interests of the UK.
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