It is trite to say that not all markets move in straight lines up or down, but in the case of the Australian dollar, the rally from below 0.9000 a few months ago to around 0.9400 at present has been quite powerful...and profitable.
In February, the call was for the AUD to move to parity over a medium term time frame and it is important to highlight that this bullish structural view still holds. By late 2014 and into 2015, the AUD is likely to be at parity or higher. https://thekouk.com/blog/aud-parity-beckons.html#.U0tlLca27wI
But what is somewhat disconcerting for that bullish view is a turn in market and economist sentiment. There are an increasing number of people who have shifting from calling the AUD lower from when it was below 0.9000 and are now bullish. It is unlikely their clients who shorted the AUD below 0.9000 are all that thrilled having been hit hard with the 5 per cent appreciation in the AUD.
The MYEFO fudges imposed on a weak and shell-shocked Treasury by Treasurer Joe Hockey and his office back in December are being shown up in the run of recent data.
This time, it is employment.
The MYEFO forecasts from Mr Hockey were for employment to rise by 0.75 per cent over the year to the June quarter 2014. This was 0.25 per cent lower than the employment growth forecast that was published in the independently prepared PEFO in August. That 0.25 per cent, as will be clear, is about 30,000 jobs and in budget terms, a lot of money.
The ABS released the March labour force data yesterday and those numbers confirmed what most sober analysis was suggesting and that is a solid pick up in employment growth in recent months is well underway as the overall rate of economic growth accelerates.
The most recent labour force data mean that for the MYEFO employment forecast to be correct, monthly employment over April, May and June has to average growth of a puny 5,000. This may be correct, but it's very unlikely. An average of 29,000 jobs were added over the last three months.
Given the momentum in economic growth, the rise in job advertisements and other labour market forward indicators, it is not unreasonable to expect average monthly employment increases of, conservatively, 15,000 a month over the next three months. If this is what happens, then the PEFO forecast of 1 per cent employment growth will prevail and the whole scam of cooking the books in MYEFO will be further exposed.
If the job creation of the March quarter is repeated in the June quarter, then annual employment growth will be nearer 1.25 per cent.
The end point is that the MYEFO numbers were the result of the new Treasurer, Mr Hockey, trying to make a lousy political point that had little to do with the true position of the economy.
The economy is doing well, really well in fact and we all should be delighted that jobs growth is picking up and the unemployment rate is ticking down. This is what, in my view, economic policy is all about. It is a pity that Mr Hockey prefers to play the petty debt and deficit political game.
Not surprisingly, the move to an above trend growth rate for the economy over the past half year or so is now generating a decent rate of employment growth. What's more, it now appears that the unemployment rate has peaked and that by this time next year, the unemployment rate will likely be around 5.5 per cent, perhaps a little less.
Over the three months of the March quarter, employment has increased by 88,000, to register the largest quarterly increase since the March quarter 2012.
The favourable news on the economy is unrelenting.
After the flood of extremely positive news last week, there has been further reinforcement of the clear upswing in a couple of series released in the last day and a bit.
Yesterday saw the number of job advertisements, as measured by the ANZ, lock in five straight months of increase in trend terms. There is now no doubt that employment growth will also lift in the months ahead and the unemployment rate will start to fall very soon.
This article, written on behalf of Per Capita, first appeared on The Drum website:
Australia is in a fine budget position and the deficit isn't nearly as big an issue as some politicians would have you believe. Just ask the credit rating agencies, writes Stephen Koukoulas.
The budget debate in Australia is so pathetically inane that the fiscal blame game has reached a point where neither side of politics wants to take responsibility for Australia's triple-A rated fiscal settings.
This perverse situation shows up with the notion that debt and deficit are political poison rather than the medicine that, when used wisely, has delivered spectacular wealth-creating returns for the economy.
The latest $700 million bond issue by the Abbott government brings the cumulative total of gross borrowing since the election to $64.15 billion. What is extraordinary about this is not the borrowing itself, but the fact that after 7 months in office, the government has not implemented any meaningful policies to stem the rise in debt accumulation.
The AOFM has indicated it will be borrowing a further $1.4 billion next week.
Indeed, as the Mid-Year Economic and Fiscal Outlook showed, policy decision taken by the new government added $13 billion to the budget deficit.
The run of data in the few days since Tuesday's meeting of the RBA Board has continued the trend of strength, confirming a substantial lift in the non-mining investment parts of the economy.
The RBA appears to be too gloomy with its views on growth and sanguine on inflation as it happily leaves interest rates at record lows, inflating house prices along the way and allowing the rest of the economy to pick up momentum at an increasingly worrying pace.
As I sit back and contemplate what is, I often wonder which is more damaging to the Australian economy: rapidly inflating house prices which are starting to look and smell a bit bubble-ish, or on the other hand, a strong Australian dollar which sort of, maybe, kind of, perhaps is a bit overvalued?
The lever pullers at the RBA clearly think it's the Aussie dollar rising that is the biggest threat with its decision today to let the house price surge continue unchecked with interest rates being held at record lows.
I don't agree with the RBA. One reason is that I am not sure the Australian dollar is all that over valued, while I am also unsure whether interest rate hikes would see its value rise for any sustained period. After all, if interest rate differentials were the main driver of currencies, the Japanese yen would be worth next to nothing and the Turkish Lira would be a world beater.
My old sparing partner and AFR scribe, Christopher Joye, thinks "when [house] prices do start sliding, it is not inconceivable that we could see unprecedented 10 to 20 per cent losses across the board".
While I am clearly worried about the current run up in house prices and can see a period where house prices will falter as the RBA moves to a monetary policy tightening cycle, Chris' view of such large falls seems to be askew.
As a result, I am offering Chris a simple two-tiered offer based on his forecast.
The RPData five city house price index rose a thumping 2.3 per cent in March which is a stunning rate of increase at a time when house prices are already elevated.
For the first three months of 2014, the RPData series shows house prices up 3.5 per cent, or an annualised pace of close to 15 per cent. This is a rate of increase that must be causing the RBA some concerns as it continues to sit on official interest rates at a record low 2.5 per cent.
While the RBA does not target house prices with its monetary policy settings, it is well aware of the macroeconomic policy risks that come with house price booms... and busts. House price booms generally lead to a pick up in speculative borrowing and a ratcheting down of lending standards by financial institutions as every one wants to get on board the price surge.