It’s an all-out attack on the greenback and everyone else is winning! The Aussie dollar has reached parity with the Canadian dollar (the Loonie) and is fast approaching its previous highs against America’s number one export (the U.S. dollar). So is this a turning point in the currency wars?
Well, like all wars, a sensible question to ask is, what are we fighting for?
Are we fighting for honest money that doesn’t lose purchasing power? Are we fighting for low deficits and strong growth? And who are we fighting anyway? The Chinese? The Europeans? Team America?
The point we’re trying to make is that metaphors are only useful if they reveal some insight into a problem that you can’t get in a straight forward way. Are nation’s using currencies as a weapon against each other? Well, maybe. But it’s more likely that each nation seeks to maximise its trading advantage by managing its currency in a certain way.
In the post World War Two era, for example, it’s been sensible to keep your currency cheap relative to the U.S. dollar. Americans were big spenders, even when they didn’t have money. And from the American perspective, what a great trade! You send paper to people…and they send you real goods and services in exchange. And you get to make as much paper as you want because the rest of the world can’t get enough of it!
It does seem like kind of a fraud. But then, money is a fraud, when it’s not backed by anything tangible. When money is backed by confidence (or a large economy, or the rule of law, or a blue water navy, or a large nuclear arsenal) people don’t ask a lot of questions until it’s too late and the currency is fatally compromised by massive debts incurred in it.
Is it too late for the U.S. dollar? The last time the Aussie neared parity, the whole world fell apart. Correlation is not causation. There’s no reason why the Aussie can’t smash through parity and go beyond. After all, Australia’s terms of trade remain high. And the Treasury expects the roaring commodity trade with Asia to deliver the Federal budget into surplus in just a few years.
Frankly, it all seems just a bit too neat. But over the last few years, we’ve found that our first week from a major overseas trip has been marked by a fuzzy brain. It’s probably something chemical. But you look at the markets right now and it just looks too good to be true. We realise that is an utterly superficial and shallow level of analysis. But it’s our first intuition, so we’re going to keep investigating.
One thing to watch for: the end of the quarter. With such a good month for stocks topping off a good quarter, it will be worth watching to see what the smart fund money does next. We use the word “smart” loosely. September surprised everyone with how good it was. You normally see a lot of “window dressing” by fund managers at the end of the month. They buy whatever went up so it looks like the owned it all along.
But getting ready for the next quarter may require less following and more leading. For example, yields on four-week T-Bills in the US have fallen by 45% in the last few days. They’re down by 60% since late August. This indicates a preference for near-cash, low-yield instruments that are not stocks. It’s an indication of risk aversion.
Will the risk trade go off the boil now? “The ASX is sinking like a stone this morning,” a colleague chimed in from across the room. “But all the gold stocks are up,” said another. “And BHP and Rio are down.” “So what’s falling?”
It must be the banks!
Not that there’s a banking crisis in Australia, at least not yet. There may not even be a problem. Heck, there may not even be any stress. But we’ll find out soon if there should be!
Wire services are reporting that ratings agency Fitch is ready to stress test Aussie banks for a 40% fall in house prices. Since Australian house prices never fall, Fitch probably won’t find anything. But it’s going to look anyway.
The agency is going to design something that tests, “different scenarios of varying property price decline.” What that means is it wants to see if falling house prices or rising mortgage default rates (that could never happen either, even if interest rates went up, which they never do) impact banks and insurers negatively (also probably impossible).
What prompted the stress test of an asset class/market that is immune to stress? Fitch says that, “Weighted average established house prices for Australia’s eight major cities rose by 18.4 per cent in the year to June 2010 according to the Australian Bureau of Statistics, and are now 41 per cent higher than they were in June 2006.”
Rising prices don’t always indicate a bubble. But sometimes they do. And since we’ve already established our position on this issue, we’re going to shut up about it now. Until tomorrow!
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