The Swan mysteries...

Poor Wayne Swan is just not getting any appreciation according to Reuters.  Despite seeming to hold the Australian economy from global crisis, Australian voters look set to punish the incumbent Labour party at the September federal election:

Around 400,000 first-time voters go into Australia's September elections with no idea of economic hardship, adding to Treasurer Wayne Swan's mounting problems as he delivers what is shaping up as his last, and most difficult, budget on Tuesday. 

Swan is confronted by a slowing economy, a mining boom which is nearing its peak, falling tax revenue and a political promise to rein in spending, leaving him with no money to spend on pre-election handouts.(here)

As notedelsewhere the obsession with surplus is a bit fanciful given the global macroeconomics and ultimately in a possibly soon crisis or contagion, will not help much (see the previous post about Australia's currency peashooter).  But while having sympathy for Wayne's position we feel it slightly ambitious to seek to blame the high AUD as the cause.  Immediate cause yes, but in global terms the high AUD is the symptom of a larger imbalance, which Wayne and his team have not addressed and will ultimately lead to their undoing.

Japanese curse? or mining the AUD bust?

Not yet but expect the peaked Aussie dollar to trend downwards with the commodities bust according to the Financial Times:

...Traditionally, Australian assets have been particularly attractive to Japanese investors, with the yield on the Australian dollar still the highest of any developed country at 3 per cent. Higher yielding emerging market currencies such as the Russian rouble at 8.25 per cent, the South African rand at 5 per cent and the Chilean peso at 5 per cent are also popular with income seekers.
Still, the BoJ effect could prove to be temporary.
“We would expect the commodity currencies to gain some near-term support from a Japanese investor reallocation, with their attractive yields, liquid bond markets and high ratings,” says Ian Stannard, foreign exchange strategist at Morgan Stanley. (here)

And Japanese mega-easing is cutting into the Aussie banks' profit margins too.  Not entirely convinced by the argument but anyway:

FLOODING the financial system with liquidity has worked a treat in refloating the global economy, but don't ask ANZ boss Mike Smith about the impact on his wholesale banking margins, particularly in Asia.
The Bank of Japan is the latest convert to quantitative easing (QE) -- central banks buying assets such as government bonds to pump money into the economy directly.
If the impact of similar QE programs by the US Federal Reserve and the European Central Bank in 2008 and 2011-12 is any guide, liquidity will expand and pressure will intensify on Asian wholesale banking margins.
The problem for the banks is that they make money by charging higher interest rates on their loans than they pay on their deposits. Once official rates start heading to zero, and deposit rates follow, any further reduction in lending rates squeezes the margin. (here)

Money is melting away...

In Canada at least.  In what is proving a headache for the country's central bankers, including Mark Carney, who recently joined the Bank of England, newly issued plastic notes have attracted criticism due to their stickiness, faults with the design, and, the fact they seem to melt under high temperatures.

Australians have a long experience of using plastic notes - the ones you can wash, but they had better hope that the Aussie doesn't follow the Loonie and fall prone to melting away! (here).

Melted Loonies (c) Mona Billard 

Japan selling AUD...an early shot in the currency war?

Or just simply smart money leaving?  Either way it signals a reversal of fundamentals for Australia.

......If we isolate the November and December MoF numbers for 2012, the pace of selling was even more aggressive. Almost A$8bn of Australian assets was sold in those two months alone by Japanese investors. That is an all time record and gives a clear sense of how aggressive this selling was... 

...Since Abenomics began in November 2012, total foreign bond purchases have not accelerated (chart 2) but the regional rotation has accelerated. Monthly MoF data show strong buying of core Europe (¥817bn per month), tiny selling of peripheral Europe and New Zealand (-¥7bn and -¥9bn), negligible buying of the US (¥2bn per month), significant selling of Australia (-¥235bn), and a meaningful increase into EM Asia and Latin America (¥73bn and ¥159bn, respectively)....(here).

Fighting the currency war with a "preashooter"

Aussie Dollar the most overvalued currency says Fairfax

...The Australian dollar is the most overvalued currency in the world, but there is little will to intervene, according to a global valuation.

Using data from the OECD's measure of purchasing power parity, The Economist's Big Mac Index and the Current Real Effective Exchange Rate (REER) as compared to its five-year average, HSBC found that Australia had the world's most overvalued currency, while having policymakers who were among the least active in the so-called ''currency war''.

''We just don't want to take that kind of risks. We are a small country,'' Mr English added. ''We'll be out in the war zone with a peashooter.''

Reserve Bank of Australia governor Glenn Stevens briefly mentioned the Australian dollar in his statement following the central bank's decision to hold interest rates at 3 per cent for this month, writing that ''the exchange rate remains higher than might have been expected''.(here)

AUD to head into the loonie bin?

Many in the markets have grouped all things Australian with Canada.  Two big resource rich countries exporting to the two biggest energy using countries, with developed financial systems attracting high inflows matched by high exchange rates.

Unfortunately many suspect Australia is subject to a similar housing boom (with matching weakness in the banks) and now with reported pressure on the Canadian currency, the loonie, investors will expect falls in the Australian dollar as well?


...It looks like sentiment toward the Canadian dollar may be shifting....The loonie, as it is known, by mid-session on Monday was on course to close at its weakest level versus the US dollar since August....The loonie’s traditionally tight correlation to investors’ perception of global growth prospects has looked very shaky of late. That soft domestic data has counteracted better economic news from the US and, in particular, China....Traders are now adjusting strategies (here).

AUD - breaking China's fall?

....The Aussie dipped below the 1.0400 level once again in Asian session trade today, after a report by the S&P suggested that China’s investment boom will have to cool considerably in the foreseeable future. According to S&P economists, who’ve come up with a model to determine the vulnerability of economies to an investment led collapse, China ranks number one on the list....(here).

Traders seized on the line stating the benign inflation outlook "would afford scope to ease policy further, should that be necessary to support demand.".....That was enough to send the Aussie dollar to an intraday low of US$1.0391 following the RBA decision from US$1.0448 before the bank announced its move (here)

...Retail trade fell 0.2 per cent in December, Australian Bureau of Statistics said, which was below market expectations of a 0.3 per cent rise. (here)