Aussie Dollar Ready to Storm Past US Dollar


Yesterday’s episode of the Daily Reckoning left off with the question of whether 5,000 was in sight on the ASX 200. The answer today is that it is just over the horizon. The index closed up 2.3% to 4,695. The more investors thought about the recovery/China/demise of the dollar story, the more they liked buying stocks (especially gold stocks).

But let’s not forget about oil. It too is priced in dollars. In fact, the big gold move started because Robert Fisk claimed the Gulf States and China et al. are tired of paying for oil in an unstable currency. You could say that gold moved closer to being money again because of how important oil already is to the real economy.

We’ll get back to oil in a moment. But there was a story in today’s Age that gave us the willies. “The Aussie dollar is poised to storm past parity with the US dollar, propelled by local interest rate rises and Australia’s close ties to the booming Chinese economy, according to currency analysts,” reports Chris Zappone.

It doesn’t sound too creepy. But there IS a creeping hint of euphoria to the Aussie story at the moment. The dollar…the economy…the fact that summer is just over the horizon…you can feel the animal spirits getting friskier. It was like this in the summer of 2008 as well, right before the bottom fell out.

But enough of the weird sense of déjà vu. How does the big picture affect your investments? That is always the tricky part. It’s one reason why we are stuffing our new offices with all kinds of traders and analysts and writers whose ideas would probably get them thrown out of a respectable job. These are just the people we want thinking about the investment future.

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.


  1. Gold still IS money Dan, there’s no ‘moved closer to being money again’

    UST yields, measured in gold, are in a rampaging bull market.

    Is it any wonder the wholesale price of gold in USD is moving up, UST’s supposedly being equivalent to gold as a reserve asset and all…..

  2. If not for my little AUD peak rule (when the AUD drops and the hot money flow reverses sell equities). I would have been out of most of my equities and the poorer for it. The heap of capital raisings on economic core businesses & deleveraging reflects board & quiet hand of govt disquiet on prospects so I am not alone. These have tempered gains if you haven’t taken profits at appropriate moments and reinvested elsewhere better than your dilution. I am running out of choices that qualify under my fundamentals, even after some new post capital raising buys.

    On ag I worry about the scenario where the chinese banks reneged on their derivative contracts when commodities went sky high. If US market and currency corruption underlines the collapse in collateral this will happen again and may be far more widespread. I also worry about the impossibilities of forward covering on an inventory that the middleman doesn’t have in his hand. My stocks in energy and resources engineering sector have hot money recipient risk and could also get caught again on currencies even though most are matching source and application of funds in the same currency (emerging markets are dollar bloc funded for instance).

    $12bn out of US consumer credit today, clipping the ticket on hot money invested abroad won’t keep them (US merchant bankers & their cohort of hedge fund knaves) solvent when the US domestic economy deleverages. 40% of all US consumer credit used to be securitised and now it is zip, same story for AU banks and mortgages.

    With AU whole sale bank bonds that have soaked up the securitisation slack being govt guaranteed and typically running 5 years, the Australian govt already owns 1/5 of Australian mortgages and owns more as each day passes. Ireland just explicitly swept all theirs off their private bank’s balance sheets. Asset prices on those AU mortgages haven’t declined to what will be nearly universal (or a tight bubble denying band) in debt-income ratios once global banking capital standards are reformed inclusive of a single raw leverage limit. So even if the rest of the world recovers and we get by as a commodity as currency play we are going to be wacked on the countercycle if any real BIS global reform becomes reality. All our debt income mess peers are getting wacked on their real estate asset prices; Ireland, Spain, UK, US.. Are we different? Yes plainly by recent outcome. But that is what can happen when you bet the house and make the market on a short term play.

  3. Where to from here ? For any particular issue(including thr POG and POO) there are multiple opposing, correlated, and counter rotating forces. Wheels within wheels.

    Some possibilities to consider:

    1. USD tanks gradually or sharply, perhaps following the failure of Treasury sales or the mooted shift away from the USD reserve. China, Japan, South Korea, Taiwan, and the BRICs (not already mentioned) realise HUGE paper losses and face significantly reduced demand for cars and widgets. Commodities now in significant over supply tank in sympathy and take the AUD with them. (Some linear thinking contrarians consider this scenario a certainty and believe money will be unwisely printed to pay the debts and fill the gaps).

    2. Not withstanding the best efforts of the World’s money printers, money in circulation remains relatively finite. Until deleveraging reduces its velocity (and impact) it will continue to populate bond, stock and property markets PREVENTING the simultaneous capitulation of these markets. The initial collapse of US mortgage market securities (along with Bear Sterns) took a long time to infect other markets FOR THIS REASON. There was too much money (excess credit) around for stocks and commercial property to drop too quickly.

    3. Continued stock market strength is the harbinger of an inflationary tsunami. Money in circulation has nowhere else to hide other than stocks, gold, bonds, treasuries, property , small business and a few other asset classes. The velocity of this money continues to increase. Adjustment occurs though inflation and tectonic price shifts between asset classes. The counter rotating wheel here is continued deleveraging as more debts default and more households go underwater. Consequent household thrift will result in global job losses UNTIL small business is (in the distant future) allowed to find its feet.

    Enough prattle.

    Coffee Addict
    October 8, 2009
  4. Some gold is money – Oz has a 1 oz coin with $100 stamped on it if I recall correctly(?) – That’s money – Take it to the bank and they’ll give you 2 nice plastic AUD $50 notes for it – Yep, no question, it’s money! A tiny bit of gold is like that.

    Then there is other gold that is better classified as “artifact” – Like King Tut’s mask. And other stuff that might squeak in as “art” – Like a Faberge egg maybe?

    And other stuff that is most realistically classified as potential scrap – Like the 9, 10, 14, 18 and 22 ct pretties on lots of ordinary folks’ appengages. (Similar to the old bit of copper pipe that I scrounged yesterday.)

    Then there is the certified 24 ct stuff in bullion form that is a commodity – A reasonable expectation would be that one would pay a bit more for it than what it costs to mine, smelt and certify – Although it goes up and down significantly with other hopes and fears.

  5. Beware the next asset bubble – Australia!

    I think it was bloomberg who ran a story last night that had someone basically saying… “buy aussies assets…. shares, property, bonds anything!”

    Sounds to me like irrational exuberance.

    The death of the USD is overdone.

  6. Geez Prozak … You don’t have to take the loss of the Brit empire that hard mate?

  7. Ned,

    What a strange comment….

    what do i care about the british empire?

    I might as well say to you… you don’t have to take the fall of the kelly gang that hard…. it has just as much relevence.

  8. sorry I should say what a strange question… as you did end it with a “?”

    which makes your comment even more puzzling…

  9. Blogging is a difficult environment Prozak – We listen listen, we hear, we form impressions … Which could be wrong. But that was my impression. I don’t have great national loyalty … But will still have a chew back when someone chomps on Oz. Although, Yes, I fully acknowledge the risks … They are WAY higher than I would have allowed a year ago. But then maybe the potential rewards are too. (No question mark there just to be provactive maybe??? Smile!)

  10. Ned,
    What was your impression? That blogging is difficult? That someone is eating something called Oz?

    My reply was to this…

    “You don’t have to take the loss of the Brit empire that hard mate?”

    It does not make sense as a question. As a statement it seems you have made some incorrect assumptions.

    Was it meant to be a statement or a question?

    You are correct, blogging, forums and comments are difficult. Made even more so by unclear writing.

  11. I use “Oz” to mean “Australia” Prozak – I don’t think anyone is eating Oz. The statement had a question mark at the end of it. Which makes it a statement that I leave room for others to question. (Aussies are a “wierd mob” Prozak – We say “Yeh, nay!” Which means nothing in itself – But is readily understood at the time of use by all involved – Seriously – I’m not “pulling your chain”! – And I imagine a linguistic might make some sort of an attempt at deciphering it.)

  12. “Someone is eating something called Oz” – The penny just dropped – I said “chomped” and “chews” – And you thought I was talking about the physical act of eating food perhaps? Given the context, that would not cross any long term Aussie’s mind Prozak – Just basic linguistic issues – Don’t lose sleep over it is best I think? Unless you actually intend to move here. In which case it is expected you can decipher the lingo of silly old buggers that talk (and write) like me … :)

  13. Ned,
    I am Australian. Born. Lived. Moved. May One day Return.
    I own property and have large amounts of super there.
    Hence why I don’t want to see it go to hell in a handbasket.
    Doesn’t mean I wont be frank when discussing how bad it could get if it all goes wrong.

  14. No probs Prozak – I surely do agree that the risks are higher than most Aussies might think. Although we’ll get a better feel for it mid term I hope – Cheers!

  15. read this

    His most recent post (after the economic jokes post) talks about debt levels.

    Now Steve Keen has been harping on for a while about houses and debt… but any rational human being can see that he is right.

    Australia is now the most indebted country in the world. Where are the greater fools going to come from?

    It has to be from abroad and that will cause an even greater bust that australians will have to suffer after the foreign capital departs.

  16. Australians are carrying uncomfortably high levels of debt. IMO. Our potential to hurt very badly if (or more realistically when) there is a recession in Asia would seem to be high – To me. Certainly high enough that I’ve had a few reservations about investing any more capital here.

    But that said, we are in many ways a developing (and underdeveloped) nation that will have to use foreign capital. And we are anticipating population growth of approximately 75% over the next 40 years – Mostly from immigration I’m sure.

    Our reliance on foriegn capital is exaccerbated by the fact the population has 1st world tastes and spending habits – There are a few smarties here who’d like to see that begin to change – I’m not sure how much success they’ll have. But we’ve got a review of the tax system due in December that will recognize such things.

    I’m looking forward to seeing what incentives that review recommends be used to encourage Australians to become more investment minded. And less reliant on debt.

  17. You have to admire Steve Keen for a.) his willingness to take a very high profile position in his forecast of a 40% drop in Oz realty; b.) his well-publicised sale of his own home; c.) his perseverance in paying rent ever since; and d.) his _many_ vocal responses to his critics who note that subsequently property in his area has risen 7%. Keen has the courage of his convictions, extreme patience and perseverance (he could hardly ever buy back in, in Australia before 2018, could he?) Oz needs more tenants like Keen, if those like me who take the incredibly-high-risk-path of property ownership in Australia, are to scrape by… ! ;)

    Biker Pete, Vancouver Island, Canada
    October 9, 2009
  18. Biker Pete you also have to respect Keen because he reckons he saw the financial crisis coming and yet he failed to short banks stocks etc…or is it perhaps he is just another one of those guys who endlessly predicts doom and simply gets it right be default…eventually ;)

    Heck I predicted the stock market would rally again back in 2008…does this mean I saw the end of the financial crisis coming? Wow, maybe I do have special powers after all lol :)

    Greg Atkinson
    October 9, 2009
  19. Ha, ha… love it…! I see Bill Bonner has used ‘eventually’ in his latest blog, Greg. If we live long enough, all may come to pass…. (even DRA giving me access to the Star rating scheme…!!!) :)

    Biker Pete, Vancouver Island, Canada
    October 9, 2009
  20. Sometimes it pays to haggle with yourself in public, here are 2 links below to negatives on the USD, the blatent monetisation of UST and agency buybacks and the trade weighted exchange rate recent history. Then there was China’s 2008 burst of buying now brought back under current trade deficit funding levels. Still I think a spontaneous deleveraging driven off the USD domestic economy is the main game, but I need to watch the forces of a continuous USD slide (otherwise called the Rubins-Summers “strong dollar policy”) ranged against that.

    And for the first time in my life I agree with Ken Henry. Unwinding the stimulus will cost 100K jobs short term, but with interest rates out of the kit the replacement to the “Greenspan put” will eventually cost 400K jobs as there is no restructuring, productivity gain, or asset price adjustment. Mr short term ticket clipper is at it again.

  21. At last a fellow traveller !
    Now only the separate issue of seeing that theory meets proof and it happens

  22. Ned,
    perhaps australia is a developing country.

    But its profile is not the same as other developing countries.

    Everyone in the UK and US were aghast and very concerned because they dipped into negative net savings for ONE year. Australia has been running negative net savings since the year 2000! (graph i saw only went to 2007 not sure about 08/09 but can’t imagine it has been much better)

    Developing countries are usually very strong savers (due a lot to the fact that gov has not developed strong social policies yet and the population know they are on their own if the shit hits the fan) and have access to a lot of internal capital and even export capital.

  23. I’m critical of Australia’s savings rate too Prozak. One thing that can be said to offset that is that 9% of salary and wages goes into super – With super being a form of savings. (I’m not sure how that would compare with the percentage of American earnings going into 401k’s for example.)

    But it carries it own risks with a lot of those superannuation monies being in stocks – And most likely Australian stocks I’d guess.

    It was at End of Financial Year 2006 maybe that the papers were raving about how well super was doing and how admirably the system was going to serve Aussies in their retirements – With the sole voice of caution being the (then) recently retired head of the RBA who reckoned that prior to super Australians would have had a lot more of their mortgage paid off and some money in the bank. And commenting on the fact that in his opinion, the additional risk that came from super’s heavy exposure to stocks should be of concern.

    Lots of strange things happen when a nation has a system like super I think – I’d be pretty surprised if a lot of Australians haven’t adopted the attitude of live for today and let super take care of tomorrow – With many of them even relying on a lump sum payout on retirement to pay off all their debts. With a bit of luck, policy makers have now said That last RBA governor seems to have had a point, and be having a quiet think about what might be done – Which is part of the reason I’m looking forward to seeing what our tax review says.

  24. The point about super vs. savings is well put, Ned. We have, in effect, prevented the vast majority of Australians from having money in the pocket for savings, paying off debt and so on (through GST, government measures to falsely prop up house prices, and compulsory Super) and instead forced them to give it to a man in a suit who will buy casino chips on their behalf and “gamble responsibly”. Of course it’s called an investment portfolio and all that crap, but it’s clear what’s going on.

    It’s the fattest pig that gets slaughtered first. Super funds are not unlike our porcine friends and they are fat indeed!

  25. Can you tell us then what is the sign that the Australian Dollar is in a fall and the US dollar on the rise (relative to the AUD again).

    I agree – don’t write off the US dollar yet. 1988 anyone?

  26. Ned,
    very true about super. and yes I imagine people have foregone saving due to super. other countries have pension plans as well – just not the compulsory super that australia has.

    I would have thought the stats included super & pensions as this is part of income. Will have to try and find out.


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