The AUD goes down under

Andrew Pegler – 28 May 2010

What happened?! One minute we’re charging towards parity, next minute we’re down like shot ducks. Well there’s a string of reasons and they go something like this.

The success of our economy in resisting the worst the GFC could chuck at us and our dependence on resources and hence direct link to the global recovery have seen the little Aussie dollar become a barometer of the health of the global economy. So the rebound in the Chinese economy and the strong recovery in commodity prices made our ‘little dollar that could’ a safe and rising bet that nearly hit mid-90s to the USD. (It’s like house prices – you buy at point A and sell at point B for a profit.)

But there is a disturbance in the force, Luke.

For starters the Euro is shakier than Johnny Cash in rehab. The problem is while bringing all those countries under the one currency called the Euro is a great idea in a globalised world, Europe’s economic and fiscal policies aren’t unified. Hence P.I.G.S. (Portugal, Italy, Greece and Spain) are up to their necks in debt and the others are reluctant to bail them out i.e. Germany. All this creates uncertainty and uncertainty creates risk and risk creates panic. And let’s not forget the market is a herd and the herd will always bolt to safe, open ground at the first sign of a lioness in the long grass. And safety right now is in USD and US bonds. And yeah I know the US is dodgy at present but it’s still the deepest and most liquid place to park your hard earned. But let’s return to the Serengeti where it ain’t just one stalking lioness, there’s a pride of ’em wanting to tear into a well-lunched belly of capitalism. There’s the May 6 flash crash on Wall Street, spiralling share markets, worries about other Euro banks, softening commodities prices (copper, gold, oil, silver, nickel, lead) and the niggling fear China’s housing bubble may burst. All these have undermined the recovery in appetites for risk among investors that has driven the markets up, up, up and away over the past 12 months and leaves the AUD a more riskier prospect than before.

Class dismissed.

And in other news… I love new terms and I heard one the other day. We’ve all heard of emerging economies but now we have ‘submerging economies’. These include Japan, the US and Europe, which are sinking under debt thanks to those tricky Wall Street products Prez Obama is trying to control and the truckloads of debt central banks and central governments racked up trying escape the GFC.