In yesterday’s Markets and Money we flirted with the idea that Australia has higher interest rates than the rest of the developed world because it has to. When you run a regular current account deficit, you have to promise higher yields on your stocks and bonds to make up the difference. If the Reserve Bank of Australia lowers interest rates too much, it could trigger a flood of foreign money out of the country and usher in a banking crisis.
There’s no doubt a weaker Australian dollar would be welcome news for a lot of people in Australia. Manufacturing, tourism, and retailers have all been hit by the higher dollar. You’ve seen layoffs, fewer visitors, and plenty of people shopping on-line to take advantage of the strong Australian dollar. The RBA has to balance these concerns with the fact that Australia’s banking sector gets at least 40% of its funding from overseas investors.
There IS one extremely positive thing Australia has going for it right now: it is NOT Europe or America. In fact, for all the reasons you can think of that the Australian dollar ought to be going down, the fact that it’s not the euro is the best reason it may still go up. Just ask the Spanish.
Spaniards pulled $94 billion from their banks in July, according to an article in the New York Times. Remember Spain requested a €100 billion bailout of its banks from its good friends in Europe nearly three months ago. The Spanish people aren’t waiting to see if the money shows up, despite the Spanish government announcing plans to inject another €6 billion into its banks.
It’s not a bank run yet, though. It’s a jog, according to one analyst. ‘You have a liquidity crisis now,’ says Pimco’s head of European credit research Philippe Bodereau in the Wall Street Journal. ‘A bank ‘jog’ is happening in Spain. The private sector is leaving the banking system.’
How uncivilised of the Spanish to not trust in the solvency of their banks. The banks may be bereft of quality collateral with which to secure new emergency loans. But even troubled property assets are better than, you know, gold. Aren’t they?
Australia’s appeal relative to Spain is obvious. Australia is not Spain. The Aussie dollar is not the euro. Granted, these are really basic observations. Our point is that leaving Europe and the euro now may be a more important decision than deciding where to go. As a port in the storm which offers temporary sanctuary (liquidity) Australia may be desirable. It’s hard to think of something else that explains the tenacity of the Australian dollar hovering close to parity with the USD.
The second quarter GDP figures released today by the Australian Bureau of Statistics could provide some data relief for the dollar and the share market. But those GDP numbers will only tell us where we’ve been, not where we’re going. To figure out where we’re going, check out Fortescue.
The company announced overnight that it will sell a power station in Western Australia for around $300 million. In another money-saving move, its delaying $1.6 billion in spending that would expand iron ore production by 40 million tonnes. And it’s firing 1,000 workers.
All of this could be a tempest in a tea cup. Maybe when Xi Jinping and Li Keqiang take over the reins of the Chinese Communist Party from Wen Jiabao and Hu Jintao sometime next month, they’ll put together a massive stimulus program designed to boost their political fortunes. Maybe it will be like 2009 all over again, but better. We’ll see.
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From the Archives…
The Pin-Up Stock of the Iron Ore Boom
31-08-2012 – Greg Canavan
How Australia Grew Fat and Lazy Off the China Boom
30-08-2012 – Greg Canavan
Why You’ll Never Change Our Mind About Inflation
29-08-2012 – Nick Hubble
The Make Believe World of Economists, Continued…
28-08-2012 – Bill Bonner
Iron Ore, a Love Story
27-08-2012 – Dan Denning