httpvh://www.youtube.com/watch?v=GqLRqaZ3d5o
Political stalemate key in precipitating a stronger Aussie, as threats linger to the broader economy.
• Millions of textbooks could by thrown out on August 3rd.
• A stronger local unit has ramifications for the broader economy.
• Governor Stevens has an answer for our own fiscal Petri dish.
Ever since the beginning of 20th century financial modelling, the humble US Treasury, the bond that bankrolls America, has been treated as the “risk-free asset”. On August the 3rd, millions of university textbooks will need to be scrapped as a potential wave of selling undermines the status quo that ensures the developed world keeps ticking over. This is obviously the worst case scenario however given the level of fear that is still apparent post GFC, this outcome would be material to the extreme. Enter US politicians. The US political system is in a deadlock as the debate between conservatives and liberals runs to the very core of what is best for the United States, which is threatening to unleash an economic Armageddon that would extend farther than simply the immediate concerns of whether tax and welfare cuts are in the best interests of America. The deadline for the debate in Washington is August the 2nd so stay tuned for more gains in the Aussie dollar.
The economic data out this week were few and far between however the key data came in the form of inflation figures. The mining boom has been instrumental in taking the nation to almost full employment, resulting in higher prices that raise the ire of the Reserve Bank. This week’s data continues the theme that we’re likely to see further action by the RBA by raising interest rates to maintain inflation to within its target band of 2-3%. With the brakes further applied to the economy, the disconnect between growth in the mining sector and the rest of corporate Australia could widen through a drop in retail sales, which account for 18% of GDP. Furthermore, should the aspiring AUD continue its rise, our agri-businesses, already running on ultra fine margins, will be at risk. The inflation data included Producer Price Index (3.4%) and CPI (3.6%).
Our RBA Governor, Glenn Stevens, noted in a speech this week a different tack for managing the “two-speed economy”. He noted that further spending should be achieved to make the most of the mining boom, “terms of trade”, to achieve a long-term benefit to the economy. He noted in his speech that we could “capitalise on our recent good fortune….to lift productivity performances while the terms of trade are high…providing the most secure base for strong increases in living standards” leading to the consumer opening their “purse strings.” With his own fiscal trajectory outlined, it contrasts heavily with the US scenario where the debate is skewed towards potentially overzealous spending cuts aimed at restoring the budget to something more respectable. Furthermore, with our own ambitions to restore the budget to surplus within the next three years, the ability to achieve a greater fiscal pulse appears limited for now.
Visit our homepage for more information on how we can help you with your foreign exchange requirements.