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."