World First Weekly Update 25th July 2012
The Australian Dollar peaks and starts plummeting….again.
• The Australian Dollar against most crosses is trading on European News and announcements outside the usual steam of economic data. This has been the case for the last 2 years as the European Sovereign Debt Crisis has unfolded.
• Good news = good for AUD strength, Bad news= bad for AUD strength. AUDUSD Cross June 2011 – July 2012 Spanish Government 10 year Bonds ( 10 year interest rate on Government Debt)
• Investors, hedge funds and managers have dumped European debt, seeing the interest rate since May last year rise heavily, and in the last few months momentum out of these sort of investments has spiked as investors panic to get their money out.
• This resembles a traditional “run on the bank” caused by a fear of panic, and the resultant loss of confidence in the financial system, and countries to pay their debts.
• Hundreds of Billions of Euro’s have exited the Euro zone ( a major cause of the AUDEUR being so high as the Euro currency has been sold off)
• Citizens of these countries have also pulled out Billion’s in Euros of cash out of ATM’s and banks, over the last 6 months especially.
Confidence in the Eurozone, and its debt problems, are a direct link to Australian Dollar value.
• With European Nations slashing spending on public programs, and infrastructure; employment in the public sector is being slashed. This reduces confidence, and hence causes the general public to cut back heavily themselves on spending. Overall this causes the economy to stop growing and contract, as confidence wanes.
• UK, Spain, Italy, and Greece are still in recessions. France is also on the edge. Moody’s the credit rating agency announced on Tuesday, it is looking at Germany for a possible downgrade in its own sparkling AAA credit rating. (contagion continuing)
• All major nations in Europe have had their credit rating downgraded, under the weight of the massive debt on their backs. This will slow growth in the area for decades to come.
• The Eurozone is the biggest economic area in the world, and China’s biggest customer. China’s growth has been steadily downgraded, as less orders are placed for China’s exported goods.
• China is Australia’s biggest and most important trading partner. As China produces less, orders for Australian minerals drop. Slowing the Australian economy, and affecting confidence here.
What is holding the Australian Dollar above parity ? And on average 20-30% above history averages against the major currencies ?
• Interest Rates: Return on Australian cash is minimum 3.5%. Europe= 0.75% US=0% UK= 0.5% – This attracts a lot of overseas capital and gives the Australian Dollar underlying fundamental strength against all its currency piers.
The Australian Economy; the only advanced economy to not go into a recession after the GFC in 2008. – Record mineral exports, low unemployment, tight regulation, and a big pool of superannuation funds and savings. Australian government bonds are AAA rated investments; one of the only governments left to be AAA rated. What will bring the Australian Dollar down fundamentally?
• A rise in interest rates in Europe & the U.S, that provides a comparable return versus Australian return’s ( this is not on the cards for at least the next 12 months- 18 months- until those economies improve) Will the Australian Dollar reach 0.93c against the USD as it did in 2011?
• If a disagreement between European nations over the conditions of the bailout to Spain delay payments, or decision’s, this causes investors to panic. They feel if these decisions are delayed or mishandled, this may cause a default by a country, causing a full blown financial crisis…..again.
• Share markets around the world are particularly sensitive to these types of announcements with stocks getting hammered quickly and without warning. The Australian dollar, being a risk-on currency tends to follow these trends.
• This is major cause of volatility in the Australian dollar. Spain, a member of the big four in the European economy ( Germany, France, Italy and Spain), is a major piece of the puzzle, and has huge debt problems, massive unemployment, and a destroyed housing sector. The prediction of the value of the Australian dollar is linked directly to the unfolding events in Europe, which have been unfolding over the last 2 years. We easily have at least a year to go, if not more, until the uncertainty and the volatility return to more normal levels.
Sell offs :
– The AUDUSD fell from 1.0790 on September 1st 2011 to 0.9385 on October 4th 2011. That’s a roughly 14% drop in 4 weeks. This is when Greece was front and centre of news.
– The AUDUSD fell from 1.0474 on 30th April 2012, to 0.9580 on June 1st 2012. This is a 9c drop in 4 weeks. This is Spain hitting the headlines before receiving their first $100B injection of cash to stop their banking system from collapsing.
Matthew Dawe Corporate FX Dealer
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