The money is betting against the Dollar and the Banks

The Fed's tapering looking to hit Australia hard - 

When Stanley Druckenmiller, the legendary hedge fund manager, told an investor conference in New York a month ago that the Australian dollar was overvalued and would “come down hard”, local traders took note.They reasoned Mr Druckenmiller’s comments would be the cue for the hedge fund world to gang up on the Aussie, particularly as it was already struggling against a resurgent US dollar.
They were right.
Bearish wagers against Australia’s currency have risen to the highest level on record, according to the latest figures from the US Commodity Futures and Trading Commission. They show a net 58,600 contracts worth a notional A$5.86bn (US$5.5bn) are betting against the Aussie.(here)

And as for the banks (only weeks ago market stars):

International investors are bailing out of Australia's banks as the United States prepares to wind back its economic stimulus programmes and the Australian dollar tumbles.
Shares in the big four banks were sold off this month after US Federal Reserve chairman Ben Bernanke said the central bank would begin slowing the pace of its quantitative easing stimulus later this year.
Among Australia's big four banks, only shares in Westpac and ANZ are traded on the NZX. Westpac shares fell from a high of $41 in May to a low of $32.70 on June 21, a decline of more than 20 per cent. ANZ shares dropped from $38.30 on May 1 to $32.60 on June 21. (here)

Australia is a basket case!

Well not quite...but a toy kangaroo is certainly in the frame - for the royal baby soon to be born to Duchess of Cambridge Kate Middleton (and Prince William of England)!

For those unaware of Australia's odd constitutional arrangements, the head of state currently is English Queen Elizabeth II and through their shared history Australians maintain a strong connection to events in old Blighty.

That doesn't explain the whole stunt though.  Due to massive party infighting ahead of the September general election, Julia Gillard is trying all manner of things to regain the initiative and garner lost popularity, amidst infighting with former also-ran Kevin Rudd.  One such step was to announce a return to her traditional side by commencing a knitting of a soft toy for the English royal baby (while having only engaged in a sexist tirade at fellow male parliamentarians the week before).  Quite daft really.

But there is a serious point here - the political sideshow is distracting from serious economic headwinds.  As Warwick McKibben notes at MacroBusiness, problems lie ahead:

The biggest risk Australia faces is the political uncertainty which is undermining consumer and business confidence.
It won’t be until the end of 2013 that there is a clear indication of the direction of government policy. The good news is that the portfolio shift into Australian assets has probably passed, partly due to this political uncertainty. A weaker exchange rate is to be expected. This will be a two-edged sword. It will help with the profitability of trade-exposed companies but it will also add to imported goods inflation which will likely push inflation outside the RBA comfort zone.

Big risks come home to roost

So you thought China was simply a customer for Ozzie raw materials?  Well yes but there's a whole lot more.  Some infrastructure financing apparently:

Roads such as the F3-M2 and WestConnex will be partly paid for by Chinese immigrants under a state government plan to snap up Treasurer Mike Baird's previously poorly subscribed Waratah Bonds.
Desperate to sell Waratah Bonds to pay for roads and rail, the state government found a solution - joining forces with the federal government to get Chinese immigrants to invest in them (here).

But more significantly China contagion presents an ugly prospect for Australia: 

Today, the home of shadow banking is China. Rating agency Moody’s estimates that shadow banking is equal to 55 per cent of China’s GDP, or $US4.74 trillion....If returns on capital in China are in the high teens but credit is restricted by regulators, then borrowers and lenders will find an informal way to interact so that each party can make the high returns available. The result has been an explosion in shadow credit which Chinese regulators have battled to control.... 

...The RBA is keeping an eye on China’s shadow banks and sees a twofold problem. One is that the shadow banking sector collapses and creates a credit crisis in China with knock-on effects for Australia. The other is that as Chinese regulators rein in the shadow banks, Australia will find out just how much of a role informal credit has played in our own growth story (here).

And as forecast journeyman Ross Garnaut explains we are at the end of the line for the Kangaroo bounce:

The prosperity of the past two decades has been a wonderful thing. Since the recession of 1990-91, Australians have had the longest period of economic expansion unbroken by recession of any developed country.
The China resources boom has passed its highest point and will soon end. Export prices are falling. Resources investment is about to decline. We will be left with an extraordinarily high exchange rate, forcing contraction of trade-exposed industries essential for the expansion of employment and output as the boom recedes (here).

And the adjustment is happening right now:

Running out of cash, Australian miners get creative to survive (here)Construction hit by $1 billion slump (here)

Dump the banks!

It is early at this stage to tell how the skid to the rally in Australian banking stocks is likely to play out, but a quick skim of the headlines is enough to suggest a real evaporation in sentiment:

Dollar puts an end to banking's party 

Our much-loved bank shares are coming under pressure, although at this stage it looks not so much a violent pricking of the bubble, but a gentle deflating like the forgotten balloon behind the couch after the raucous party (here).

and 

Australian bank stocks fell the most in a year as investors sold out of a rally that had driven financial shares to a record high last month....The rally pushed bank shares to record highs with UBS AG (UBSN) analysts led by Jonathan Mott calling Commonwealth Bank the most expensive lender in the world on May 15. 

 “The market run has been so skewed towards high-yielding stocks and financials in Australia, and now with worries about China, foreign investors are withdrawing,(here)

and also:

Foreign investors dump big four banks 

The Australian dollar faces further sharp losses in the next 12 months as it rediscovers its historic link to commodity prices, analysts say.

The dollar sank to a fresh 11-month-low of 95.94 yesterday. It was trading at 96.8 US cents this afternoon following a rollercoaster overnight session....The revised forecasts from analysts come as HSBC flagged Australia’s entry into the global “currency war”, which has seen central banks print billions in cash to push their currencies lower (here)

Dollar bust?

The Australian dollar has been hit by a fresh wave of selling, plunging to another 11-month low as investors continue to pile into its US counterpart. 

The currency fell as low as 97.98 US cents in offshore trade, a level not seen since early June 2012, and down from 99.12 US cents about midday on Thursday. In early trade on Friday, it had recovered to 98.22 US cents.... 

The Aussie dollar has dropped 5 per cent this month. It started tumbling amid more signs of a slowdown in China and after last week's interest rate cut by the Reserve Bank. (here)

Aus/NZ solidarity

Australians are a competitive lot.  They punch above their weight on the international stage, in particular in the sporting arena and Aussies like to win, and, to play in the big leagues.  In the world of currency management, or in particular, the global currency wars, the FT has reminded that Australia and New Zealand are unfortunately minnows when it comes to suppressing the exchange rates of their currencies from hot money appreciation - they hold a "peashooter" rather than a bazooka.

...New Zealand’s direct action was the most aggressive, but it seems designed to soften the kiwi’s strength rather than halt the trend in its tracks. Which is just as well given that a housing bubble is limiting officials’ room for manoeuvre. With two-year bond yields near 2.5 per cent (compared with the US at 0.23 per cent and Japan at 0.11 per cent), it is hard to see the New Zealand dollar extending last week’s 2 per cent drop against its US counterpart.
Meanwhile, Australia’s unexpected rate cut had a similar effect on an Aussie dollar hovering just above parity with the greenback. Bond yields there are in line with Kiwi ones. So are Korea’s. Of the three Seoul is historically the most aggressive in acting to stem currency strength. But it faces the biggest problem, namely that it is in effect fighting not the dollar but the yen, against which the won has hit four-year highs (here).

And this game has gone global.  As Zerohedge notes, even Israel has joined, though with a not very convincing alternative excuse other than the currency wars. 

Soros shorting Aussie Dollar...?

Not the first? 

The Australian dollar fell in evening trade on the back of rumours that billionaire US investor George Soros is betting the local currency will fall...The Aussie dollar slipped from $US1.0284 in late local trade to $US1.0253 in offshore trade as traders reacted to unconfirmed rumours that Mr Soros - who famously shorted the British pound back in 1992 - was planning a raid on the dollar ahead of Tuesday's interest rate announcement....

A large number trades shorting the dollar totalling $US1 billion were placed via Hong Kong and Singapore late Monday, believed to be by Soros Fund Management (here)

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)

Aussie dollar poison III - the mining and resources industry

It's just too expensive, apparently.  Oh and add to that increased competition and changing markets.  That's the message about the expected cutbacks in Australian mining projects according to a new report by ANZ which was profiled by Macro Business.

....We have again revised lower the potential pipeline of major projects in Australia to AUD440bn as at March 2013 from AUD474bn in October 2012 and AUD498bn in July 2012..... A considerable degree of uncertainty remains for currently uncommitted projects with only 60% (i.e. AUD270bn of the AUD440bn total) of the potential pipeline either committed or already under construction....
... the possible next wave of LNG investment in Australia faces a variety of challenges related to escalating labour costs, the high Australian dollar and the potential competitive threat of LNG exports from the United States. As a result, there is now only a very small likelihood of further onshore greenfield LNG developments being commissioned. ...
...Note that in effect that is $30 billion dollar’s worth projects disappearing per year for the next three years. That’s 2% of GDP per annum for three years gone. My goodness, that is a lot. And that’s before we add any multipliers which the RBA so loves to do.... (here).

And this at a time when new chief of BHP Andrew McKenzie is starting a slash and burn exercise in flattening the senior management and cutting projects.

Aussie dollar poison II - the car industry

As noted previously Aussie manufacturing is in crisis thanks to resurgent China trade, capital flows and the currency war causing a high exchange rate.  In addition to the Economist, many in the media and politics have been despairing about the future of the country's at risk car industry.  It was all kicked off by news of Holden's cuts and comments from ex-Ford chairman Jack Nasser at an industry function.  As noted elsewhere the industry in Australia has seen a mix of union skullduggery, inconsistent policy, poor consumer interaction and small scale.  Nasser said:

....''As soon as you have a reduction in the scale of domestic manufacturing - let's assume one of the three decide to exit Australia in terms of manufacturing - then you end up potentially with a sub-scale supplier infrastructure. And once that happens, I think it's a domino effect.''He then neatly spelled out the challenges facing the car industry: ''You've got an exchange rate that's at . . . a 30-year high, you've got higher costs in Australia, you've got excess capacity in the automotive industry worldwide, you've got a very weak currency in Japan, and you've got a weak Euro. And when you put that mix together it's very difficult then to expect a relatively small but talented Australian automotive industry work its way.'' (here).

Doesn't bode well for the future.

Aussie dollar poison

Poor South Australia.  Last year it lost the Olympic Dam megaproject and now the Economist points out that Holden (the local GM subsidiary) is looking to cut jobs in the state.  Not only that, the magazine lists whole industries which are being struck off as uncompetitive thanks to the record high Aussie dollar:

....Holden, a subsidiary of General Motors and one of Australia’s biggest carmakers, cut 500 jobs, most of them in Adelaide, the state capital. The job cuts and Australia’s trade boom with China have a common thread: Australia’s mighty dollar. Chinese trade not only helped Australia survive the global downturn. It has also boosted the currency’s strength, and made it harder for manufacturers to find markets for their exports. The problem is unevenly distributed around the country. South Australia has suffered the greatest pain: in no other state does manufacturing account for such a big share of the economy....
.....Australia’s dollar recently soared to its highest level in nearly 28 years, on a trade-weighted basis.... The currency’s rise [has] meant that making things in Australia is almost three-fifths dearer than it was ten years ago. It has overwhelmed successive governments’ efforts to steady the carmakers with subsidies. Five years ago, Mitsubishi closed its plant in Adelaide. Australia’s remaining carmakers, Holden, Ford and Toyota, have shed jobs steadily since then. Australians are buying imported cars more cheaply than ever, especially from Japan; their dollar has risen by 26% against the yen since October (here).

As the article notes Julia Gillard is pressing onwards and upwards in engaging with China.  Her own constituents may wish for more efforts directed at home.

AUD is not a reserve currency...

An interesting side issue from the currency war debate.  In talking up the likely devaluation of the Aussie dollar, Debelle mentioned its widespread holdings among central banks.  It is true that hot money, including from central banks has been attracted to Australian bonds, with Australia seen as a relative safe haven, having high interest rates and good metrics.  

First thing to note is that metrics are degrading.  Swan's budget is sinking into deficit like a dead dodo (estimates are sinking to $15 billion here).  This means less incentive to hold Aussie dollar bonds.

But more significantly, Australia is a very small economy.  The argument made previously for not intervening is that Australia's debt markets and central bank are too small to counteract global flows.  Overall, thanks to mining plays, Australia's dollar has the character of an emerging market currency, once hot and decoupled from atlantic turmoil, now facing outflows.

Unlike China, which cannot sell parts of its massive holding of treasuries for fear of wiping out its remaining holdings, there is no reason why all those central banks Debelle is talking about will feel inclined to keep their Aussie bonds.  Debelle said:

....There's no limit on our ability to supply Australian dollars...we have more Australian dollars than anyone else in the world because we print them," he added, pointing out that Switzerland had successfully capped the value of the Swiss franc against the euro since 2011....(here)

Firstly there is no comparison between Switerland and Australia in terms of the size of their fx markets or Switzerland's proximity to the Eurozone.  Secondly and more importantly, who will even want Aussie dollars in months and year's time? 

RBA fighting a phoney war

Well certainly not a currency war.  As twitter posts have been appearing with news that Malaysia has joined the currency war, RBA board members are now talking about the possibility of joining - following other nations to lower their interest rates....Roger Corbett got a mention (here) as did Guy Debelle...

...‘To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates,’’ he said in a speech to the University of Adelaide Business School. ‘‘We still, obviously, retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.’’....But Mr Debelle warned that cutting interest rates too far could also create problems for the economy - forcing up the price of assets and causing people to borrow more than they could afford....(here).

This is for an economy where there is already a bursting property bubble and asset price trend.

Meanwhile even the RBA is admitting the Aussie dollar is overvalued, but not by much they say!

....THE Australian dollar was overvalued by as much as 15 per cent late last year according to modelling released by the country's central bank....The local currency was between 4 per cent and 15 per cent over valued in September and about 7 per cent above fair value in December, papers released by the Reserve Bank of Australia under the Freedom of Information Act showed....Even so, the central bank papers said the currency wasn't having a "highly contractionary" affect on the economy...(here)

(the Economist calculated the overvaluation at 60% recently).

Australia avoids the currency war at its peril

Terry McCrann has put it best in a refreshing piece in the Sun-Herald:

....AUSTRALIA is caught smack in the middle of a real live shooting war. Even if it's not bullets and bombs that are being fired.The overwhelming majority of Australians don't know it's going on. And if they did, they'd probably think it was good news for them....And up to a point, they'd be right. Trouble is, "that point" was reached some time last year. Until then, we were beneficiaries. Now we're at risk of becoming - serious - collateral damage....It's the global currency war. Everybody has been trying to weaken their currency to boost their own economy. In echoes of the trade wars of the 1930s - stuff everybody else...

...So how it plays out from here, is critical to everything that impacts on your financial and economic wellbeing. Property prices. Interest rates. Inflation. The stock market. Superannuation. Whether you have a job. Which businesses thrive, which ones shrivel....In recent weeks, the Aussie dollar has drifted in something of a backwater around $US1.03....  The RBA might not seem too fussed. But it is very, very fussed. (here).

Alan Kohler had a good piece looking at the role of Japan and the inability of the Australian government to do anything meaningful.  Are you paying attention Wayne?

...In this context, the Labor Government's "industry and innovation" plan this week is a drop in the ocean, not that anyone expects a big dollop of deficit spending to support manufacturing, or expects the Reserve Bank of Australia to join the currency wars and target higher inflation....

The RBA and the ALP have done what they can. The cash rate is now as low as it's been for 40 years and despite some problems with unionised construction, wage costs overall are not really a problem.....But despite record low interest rates, monetary conditions for Australian businesses are at a record high.....That's because the transmission mechanism between interest rates and the exchange rate has broken down, in turn because of three waves of quantitative easing by first the US, then Europe and now Japan....Japan, straw, camel's back (here).

NZ performs the Haka

In the currency war being unleashed around the world, central bankers have some weapons at their disposal but not many.  Trading strategies - money printing, security creation and bond buying have taken off in the last few years but the role of policy, briefing and government led signals are important too.  The most notable stunts have included a parade of camera work at the Bank of England gold vaults (including a visit by Queen Elizabeth II), sound bites by Russian central bankers and outright lies issued by the G20.

New Zealand has chosen to go for the talking down option (sensible given New Zealand is a small country with little reserves) but has really performed a Haka dance - that made famous by the All Blacks rugby team, defined by Wikipedia as:

... a traditional ancestral war cry, dance or challenge from the Māori people of New Zealand. It is a posture dance performed by a group, with vigorous movements and stamping of the feet with rhythmically shouted accompaniment...

As detailed by FT Alphaville, NZ is entering the fray:

....We believe the exchange rate is significantly over-valued relative to what would be sustainable long term in the absence of sizeable increases in the terms of trade and productivity....The Bank will intervene when circumstances are right. We will use the OCR as circumstances require and we’re exploring the scope to use macro-prudential instruments that address increasing challenges to financial stability associated with ongoing increases in house prices, and that can also support monetary policy.... (here).

http://1heckofaguy.com/

Now, it is about to be Australia's turn, yet the RBA is silent...what gives?!

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).

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)

RBA Rate Cuts...will come too late ?

....Translation: We cut rates four times between May and December last year, pulling the cash rate down from 4.25 per cent to 3 per cent. That’s a hefty reduction, and there's evidence that it has boosted activity. Even though this variable rate-based economy spreads the cut fairly quickly, however, we don't think we have seen the full impact of those earlier cuts yet.........

......The currency is high mainly because rates in the developed economies overseas are at or close to zero, however. Foreign money has been pouring in, to capture our still-relatively high fixed interest rates, and to hide from the northern hemiphere’s economic carnage. Another rate cut won’t change that dynamic materially. The $A is probably high until either the northern hemisphere begins growing strongly again, pushing rates there higher, or – a much worse ‘‘solution’’ – global growth stalls, killing australia’s resources economy in the process.....(here)


....AUD/USD is down in Tuesday trading, and has dropped below the 1.04 line. Although the Reserve Bank of Australia maintained its benchmark interest rate at 3.0%, market sentiment turned against the Australian dollar as the central bank left the door open to further cuts in the near future. (here)