Aussie Peaks and U.S. Economy Slows…

MELBOURNE AUSTRALIA 28 November 2006 - Should we really care about the result of the Victorian State election?  We only mention it because the media seems to think we should care.  But when your correspondent was discussing it with a couple of acquaintances over a pint of Kilkenny at the Mitre Tavern yesterday evening, we realised it wasn't really all that important.

"What do the state governments do anyway?  They are just glorified councillors.  The states' power to raise revenue is fairly limited.  Most seem to rely on property stamp duty, or gaming taxes, or fines.  Plus they get a huge wad from the GST" your correspondent offered to, it must be said a rather disinterested audience.

"Considering that I don't intend on moving house again soon, I don't gamble, and I try to avoid speeding tickets where possible, it doesn't really bother us who wins."  Premier Steve Bracks has been rightly or wrongly labelled a 'do nothing' Premier, but frankly the lack of any major new infrastructure projects or sporting events has not bothered us one jot.  Here's to 'do nothing' governments - everywhere!

A subject that we haven't broached in some time has been the performance of the Australian dollar.  It has for some time been range bound in the mid USD$0.70's, with only brief excursions either side.

Yet yesterday saw the Aussie reach levels that it hadn't dare to transgress since late 2005.  As yesterday's Australian Financial Review pointed out, a number of sluggish economic indicators from the US suggested that the US economy is slowing down and perhaps even, that the Federal Reserve may consider cutting rates to stimulate a bit more growth.

Whereas locally, BIS Shrapnel are arguing that inflation could prove harder for the Reserve Bank to control than they think and that there could be cause for multiple interest rate rises.

The Fin Review article also states that economists are forecasting that the US economy will rise by around 0.5% less than non-US economies.

According to Robert Rennie, chief currency strategist at Westpac, he told Reuters that "The Aussie is going to find it very hard.  It has come a long way."

And Tony Morriss senior currency strategist at ANZ Investment Bank told Reuters "The Aussie is not uniformly higher having lagged the rally in the Euro and the British pound in particular and is now looking more vulnerable on the Aussie/Yen cross should we see more evidence of further unwinding of 'Carry Trades.'

While Richard Grace, currency strategist at Commonwealth Bank commented on the statement made by the Chinese deputy central bank governor who claimed that the US dollar was set for a long term decline, plus falling interest rates.

Grace said, "Most notable and somewhat at odds with the market's reaction to Wu's comments is the fact that China's central bank has been diversifying into non-US dollar reserves for years.  The US dollar sell-off appears to be a short-term overshoot.  Neither the stock market nor the bond market has reacted in the same way as the currency to the same news about a downgrading of US economic growth."

And things didn't appear to get much better for the US economy overnight, nor for that matter the knock-on effect for the Australian economy and stock market.  US super giant retailer, Wal-Mart (NYSE: WMT) showed a small drop in sales which has started to turn the market towards the thoughts of a bearish Christmas shopping period for retailers generally.

Obviously the knock-on for Australia is that the slowing growth in US retail spending may put the brakes on the demand from China and elsewhere for raw materials that go into the production of those goods.  Further, if Asian companies are being squeezed with lower profits it will also impact the domestic spending in Asian economies which will also have an impact on the demand for raw materials.

With a 150 point fall in the Dow Jones overnight, it doesn't make for good reading at the open of our market this morning.

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