A Sing in the Top of the Aussie Dollar

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Jacob Lew has been nominated to be the next Treasury Secretary of the United States. Mr Lew is an Obama Administration loyalist and insider, and is committed to the President’s strategy of taxing his way out of America’s $16.4 trillion deficit.

Yes, sadly, America’s fiscal woes will be front and centre in the financial markets again for the next month. There are two things going on. First, part of the ‘fiscal cliff’ deal was to delay the automatic cuts to military and domestic spending until March 1st. The ‘sequester,’ as it’s called, is a buzz saw that kicks in if no deal is reached.

The second drama is the fight to raise America’s debt ceiling. The $16.39 trillion statutory debt ceiling has already been breached this year. The US Treasury can move money around to keep the government in business while negotiations take place between the White House and Congress. Those negotiations will be over how much spending to cut, where to cut it from, and probably some new tax discussions.

There will be a lot of rhetoric and drama. But the net result will probably be more taxes, some delayed spending cuts, and a weaker US dollar, with the US Treasury buying an increasing amount of US government bonds. All of this bodes well if you’re a fan of a strong Australian dollar and a bigger Australian corporate bond market.

The strong dollar is good for Australia in the sense that it acts as a magnet for global capital flows. Last year in an issue of The Denning Report, we showed how this trend was headed in the direction of a bigger corporate bond market that was more accessible to Aussie investors. It would be an alternative to shares, and provide local money to finance corporate bonds (and probably infrastructure bonds).

It looks like all that’s one step closer to happening. The Gillard government is set to release its draft legislation on the issue today. If you were a contrarian, you’d have to think this is the sing of a top in the Aussie dollar. But we’ll see.

In the meantime, we’ll begin to turn our attention to Australia’s politics next week. It’s an election year! If you couldn’t get enough of politics last year with the US election, you’re in for a real treat. Until Monday…

Dan Denning,
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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2 Comments on "A Sing in the Top of the Aussie Dollar"

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Lachlan
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I am pleased with a strong dollar. Giving your economy a weak currency is like giving your kids too much of the easy life. They get spoiled. With a stronger currency the going gets a little tough in a good way. There is still a yield a damper on inflation and a way for the tough or the faithful, the entrepreneurs, to get going.
Granted there is no doubt in my mind we are not in this situation for those reasons. Unfortunately I believe Glenn will tap (rate decrease) on the throttle again shortly.

Nick
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“The strong dollar is good for Australia in the sense that it acts as a magnet for global capital flows”

I would argue interest rate differentials, not a strong dollar, is a magnet for capital flows.

I would agree, retail investors buying bonds = the jigs up.

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