AUD - Parity beckons

Tue, 25 Feb 2014  |  

It seems most of the market has missed it, but the Australian dollar has already had its sell-off, dropping from 110 US cents in July 2011 to 86.60 cents just last month. The peak to trough fall is over 20%.

Down at around 87 or 88 cents was the time to get in because the pick up, back to around 90 cents at the moment, is just the start of trend that should see the AUD move back to 95 cents and then above parity.

With any good fortune Australia's way, a retest of the 110 high is possible in the next 24 months.

The drivers of the Aussie dollar are best summed up as commodity prices, the trade balance, interest rate differentials, risk via Australia's sovereign credit rating, global growth and cross border investment flows. There are others, but they are generally of low importance.

Most of these drivers are either neutral or positive towards the AUD.

• Commodity prices are flat to up. The RBA's own index of commodity prices in USD terms is down just 0.3% since July 2013. The broader CRB index, which is a better proxy for global activity and inflation pressures, is up 10% from the January low and is at its highest level since February 2013.

• Australia's international trade balance on goods and services has turned from monthly deficits around $2 to $3 billion in late 2012 and early 2013 to surpluses in the last two months. This suggests, at the very least, the AUD around 90 cents is giving a huge boost to the traded part of the economy.

• The interest rate differential between Australia and the US is edging out, notwithstanding the Fed's policy resolve to taper its bond buying program towards zero. In Australia, the flood of positive economic news and higher inflation has seen the market swing from pricing in a cash rate near 2.0% to now be pricing in rate hikes in the next year or two.

• In terms of risk, there is no material threat to Australia's triple-A credit rating. The fiscal position is in tip top shape and when Treasurer Hockey delivers the budget in May, a move to budget surplus will only reinforce the rolled-gold fiscal settings that have been evident in Australia for the last few decades. Australia will remain a shining light for global investors because of the triple-A status.

• It terms of global growth, which admittedly is a proxy for commodity prices and risks, the news is good. It seems the recovery in the world economy is rolling along and while I admit to being somewhat cynical about the deliverables from the G20 Finance Minister's meeting, if there is any bias to stronger growth that comes from the world economy over the next year or two, Australia, and the AUD, will be caught up in the flurry.

All of which suggests the AUD will be biased higher over the next year or two. If we get unexpected strength in the global economy and the RBA acts to hike interest rates earlier than the market is thinking, a powerful move is more likely than not.

For what its worth, the AUD is likely to be above 95 cents towards the end of 2014 and in a 100 to 105 range by the middle of 2015.


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The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link:   


The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced. 

What's ahead for the Australian economy and markets in 2020

Thu, 02 Jan 2020

What's ahead for the Australian economy and markets in 2020

Happy New Year!

2020 will be a year where Australia’s annual GDP will exceed $2 trillion, our population will get very close to 26 million people and we will clock up 29 years with no recession.

It is also a year where the economy will be a dominant issue for policy makers, will drive what happens to interest rates, will help drive investment returns and will feed into the well-being of the Australian community. 

2020 kicks off with relatively good news in terms of economic growth, even though the labour market is likely to remain weak, with wages growth struggling to lift and inflation remaining below the RBA’s 2 to 3 per cent target. The Reserve Bank may have one more interest rate cut in its kit bag, but by year end, the market is likely to price in interest rate increases, albeit modestly.

The ASX, which had a great 2019 is set to be flatten out, in part driven by the change in the interest rate outlook, but it should get a boost from better news on housing and household spending.

In terms of the specifics, I have broken down the 2020 outlook into a range of categories and given a broad explanation on the issues underpinning the themes outlined.

GDP Growth

It’s a positive outlook. A pick-up in GDP growth from the current 1.7 per cent annual rate is unfolding, with the only real issue is the extent of the acceleration.