Everyone wants the Aussie dollar to retreat, except for travelers going overseas. The welcome fillip tourists get to their spending power is little consolation for exporters and import competing manufacturers who cannot compete against cheap imports.
The Reserve Bank of Australia (RBA) cut the cash rate by 25 basis points (bp) on Tuesday 4 December 2012 to 3 percentage points, a level which the RBA had previously described as "desperation". The 3 percent rate has not been seen since the days of the global financial crisis (GFC) when the RBA and the government hurled everything except the kitchen sink at the economy to prevent a "depression". As it was, Australia was lumbered with useless school halls, self igniting ceiling insulation and cash handouts that pensioners -- working on the principle it wasn't their money anyway -- shoved down the the mouths of poker machines all over Australia. That even a dysfunctional organisation like the Australian Labor Party could even contemplate reinstating the author of this lunacy, Kevin Rudd, as prime minister is enough to make one despair for the democratic process.
The reason the Aussie dollar won't come down is that it is now a reserve currency. In the days gone by, when the International Monetary Fund (IMF) ruled the world, fixed exchange rates were fixed by governments. Nations could devalue their currencies in a series of competitive devaluations. With exchange rates now -- in theory -- set by the market, this shouldn't happen. These "beggar my neighbour" policies, which many economic historians blame at least partially for the Great Depression of the 1930s, are not supposed to happen now. But the pundits didn't count on the Fed's "Helicopter Ben" Bernanke cranking up the printing press and flooding the world with greenbacks. It's only dawning now on America's competitors that this is a form of devaluation aimed at giving US exporters a competitive advantage. This devaluation works because most the world's trade is still conducted in US dollars.
For smaller economies without the clout of Bernanke's Federal Reserve or the US Treasury, there is only so much they can do to hold the line. The Swiss have accumulated reserves running into the hundreds of billions as they try to hold their peg against the euro. For Australia, no matter how low the cash rate goes, the Aussie dollar will hold up, not least because the Aussie dollar is a proxy for the Chinese yuan. Unless the Chinese banking system collapses, which is possible but unlikely, the Aussie dollar will hold up. The more likely situation is that China will go from double digit growth to steady growth in the mid to high single digits on the back of domestic demand. For those buying the Aussie dollar, it's an indirect bet that the Chinese economy will achieve sustainable growth without China basing its economic growth on being the lowest cost exporter. As for the RBA being able to force the Aussie dollar down through unilateral action, forget it. About all they will be able to do is annoy FX traders from time to time.
For previous posts, see "Aussie dollar unlikely to collapse" (4 Oct. 2012) and "Aussie dollar just won't stay down" (9 Nov. 2012).
No comments:
Post a Comment