World First Weekly Update: Wednesday 22nd August
It’s hard to soar like an eagle when the world is choking in debt
A Layman’s Guide to what is going on with the AUD
· 5 Weeks of stability has seen the AUDUSD rise, but huge risks remain for the rest of 2012
· The Hangover of The European Debt Crisis has smashed growth forecasts around the world
· EUR currency has strengthened under this cloud of confidence, sending the AUDEUR backwards and the EURUSD up.
The Australian Dollar is defying its dizzying heights despite a weakening global outlook, but significant risks remain for the rest of 2012
The Hangover
· Iron Ore, Australia’s top export is down almost 10% in the last few weeks as demand from China wanes
· Japan July exports fall 8.1% from a year earlier
· Chinese cotton demand drops 11%
· UK Trade Balance plummets on recession
· UK accelerates into a deepening recession
· Canada and NZ unemployment rate goes up with loss of jobs
· Retail Sales in the U.S contract month on month
· Manufacturing in the UK, US and Germany deteriorates
· Global growth forecasts are constantly downgraded over the past 6 months
The Risks
The Euro Zone Debt Crisis
The debt crisis is certainly not over. As detailed in previous discussions, Spain is a huge problem and will need ongoing assistance to prevent total sovereign bankruptcy. Many provinces and municipalities are tinkering on the edge or will need full blown bailouts from the Government, which in its self is out of cash. Banks are also out of cash, as interest rates remain just below pawn shop levels.
– This stability has so far lasted for four to five weeks but there are huge ongoing risks. It may just be a matter of time before confidence around the world, U.S stocks and the AUD gets hit hard from news events out of Europe.
The U.S Debt Ceiling and fiscal cliff
Some quick statistics:
– Public debt is $11.12 Trillion USD ( that’s $11,120,000,000,000 USD)
– U.S Tax receipts are roughly $2.5 Trillion per year
– The U.S Government is currently spending $4 Trillion per year
– This is a roughly $1.5 Trillion USD black whole (deficit) of debt that is being added per year, this means the U.S Government is borrowing $4.1 Billion dollars per day
Not to mention the economic problems this creates (just think of your family budget…) In the U.S, the amount of debt the U.S can hold has a ceiling that is written into law. The debt ceiling has been increased a total of 102 times, 8 under George Bush alone, however the only way to increase it is a new law. This law must be voted on and passed though the House of Representatives then signed off by the higher level Senate and finally by the President. Since 2011, Republicans have controlled the House of Representatives and Democrats; the Senate. Today, the Democrats do not have the luxury Bush had of controlling both houses of Congress.
Last time it took four weeks of bickering and political games to come to a deal on lifting the ceiling. This resulted in the U.S economy faltering and confidence being hit hard, due to the uncertainty and the fear the U.S could default on its debt obligations.
– The U.S will run out of money exactly 1-3 weeks after the Presidential Election in November if Republicans choose to block the bill. This will dent confidence in the recovery and see the AUD fall.
Iran Tensions
Iran is surrounded by U.S controlled Afghanistan and Iraq; it is the last major Oil producer not controlled by U.S and western interests. Heavy sanctions were approved by the U.N security council (with the backing of Russia and even China) this has caused economic hardship. Oil exports have plummeted from the nation. This is putting pressure on the leadership of Iran and could result in confrontation. Many U.S ships are now based in the Strait of Hormuz, a narrow strip of water that a huge amount of OPEC oil exports must flow through to reach the rest of the world.
– If a confrontation or skirmish results, we will see oil prices sky rocket, bringing the U.S economy to its knees and stop a recovery in it tracks. This is all bad news for the AUD.
Significant risks remain for the value of the Australian Dollar against it peers. The never-ending European debt crisis, U.S debt ceiling and Iranian tensions remain prevalent as ever. Any eventuation of these will result in a huge fall in the value of the AUD, as we have seen before.
Aussie fundamentals remain strong resulting in elevated value levels. However, we remain at the mercy of outside events which are looking negative for the rest of the year.
Matthew Dawe
Corporate Dealer- World First Australia
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