Why the Aussie dollar is flying high

Mon, 13 Feb 2017  |  

This article first appeared on the Yahoo 7 Finance website at this link: https://au.finance.yahoo.com/news/aussie-dollar-where-art-thou-035132180.html 

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Why the Aussie dollar is flying high

The Australian dollar has been rising strongly over the past six months and not just against the US dollar where this morning it is hovering just under 78 cents.

The Aussie dollar is also buying over 0.72 euros, the highest level it has been since early 2015 and is up some 10 per cent since May last year. It is also strong against the British pound, Japanese yen and Canadian dollar. In simple terms, the Aussie dollar is flying.
The reasons for the strength are clear.

Importantly, Australia has some of the highest interest rates in the industrialised world which means global investors are keen to pick up a positive yield with their Australian holdings versus those in other countries. With the RBA signaling that is has no plans to cut interest rates and rates in Europe, Japan and Canada unlikely to be hiked any time soon, the Australian dollar is likely to remain attractive for some time.

The other vital element supporting the Australian dollar has been the surge in commodity prices over the past year or so and the fact that this is showing up in a spectacular turnaround in the international trade balance from sizable deficits to what was a record monthly trade surplus in December.

With Australia’s exports dominated by bulk commodities, when the price of these commodities increases, the companies that extract the iron ore, coal and other materials enjoy what is a windfall gain in their earnings. A number of things accompany this. As foreign currency export receipts rise, these firms need to convert a large proportion of these proceeds into Australian dollars – this simply increases demand and pushes the dollar higher.

It also means that there is an income boost for the overall economy. This improves general conditions, sees a surge in tax revenue to the government and the budget position is improved. At a time when the triple-A credit rating is hanging by a thread and as a result there was concern that a credit downgrade would undermine the Australian dollar, this fortuitous but clearly good news on the budget materially reduces the chances of a credit downgrade, which improves confidence in Australia and with that the currency moves higher.

Forecasting moves in the Aussie dollar is a tough gig. That said, there are reasons to think that it is now fully valued – in other words, it is due for something of a fall.

The market is under-estimating the risks of an RBA rate cut given the low inflation climate, relatively high unemployment and record low wages. If at any stage, the market comes to price in a possible further rate cut, the dollar would come under pressure,

If, as appears likely, the commodity price rally runs out of steam (coal prices have already dropped for their recent highs) , then other key support for the Aussie dollar reverses.
It seems a track back below 75 US cents could quickly emerge, with similar or larger falls against the euro, British pound and Canadian dollar.

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THE LATEST FROM THE KOUK

Why are Bill Shorten and Labor scared to run on the economy?

Tue, 21 Mar 2017

This article first appeared on The Guardian website at this link: https://www.theguardian.com/australia-news/2017/mar/16/why-are-bill-shorten-and-labor-scared-to-run-on-the-economy 

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Why are Bill Shorten and Labor scared to run on the economy?

The dust is settling from the Western Australian election and there are some implications for the way the federal Labor party should conduct itself from now until the next election if it is to enhance its chances of winning.

For the Liberal party, the lessons are clear. It might sound trite to mention it but its electoral success will depend almost exclusively on its ability to deliver materially better economic conditions between now and election day.

For Labor, the task is easier. It needs to take the initiative on the economy, economic policy, the budget deficit and government debt and highlight how poor the Coalition has been in most aspects of economic managements since the 2013 election.

In those three-and-a-half years of the Coalition being in charge of the economy and budget, growth has been sluggish despite favourable conditions in Australia’s major trading partners. The Australian economy should be stronger because of the welcome news of the Australian dollar falling sharply in recent years, which has provided a boost to domestic economic conditions. What’s more, interest rates have been cut to record lows, yet the economy has been struggling to register annual GDP growth near 2.5%, the unemployment rate is the same as when the Coalition won the 2013 election, wages growth has plummeted to a record low, and the government debt has grown significantly faster than during the previous Labor government, which of course included the fiscal stimulus measures that kept Australia out of recession.

Ever since the mid-1990s, the Labor party has been reluctant to run hard on issues to do with the economy. For some reason, it is riddled with self-doubt that stems, it appears, from the high interest rates of the late 1980s and early 1990s, and its proactive use of budget debts and moderate debt accumulation during the global crisis to ensure Australia kept growing and to protect an estimated 200,000 jobs.

A $2 billion national building snow job

Sat, 18 Mar 2017

Prime Minister Malcolm Turnbull reckons his Snowy Hydro $2 billion investment is a “nation building project”.

Yes, that is what he said. Really. Turnbull think a one-off $2 billion government infrastructure project is “nation building”.

Let’s look at $2 billion in the context of the Australian economy.

In the December quarter 2016, Australia’s GDP was $435,445 billion dollars (seasonally adjusted). This works out at $4,769 billion a day which makes the $2 billion snow job about 10 hours GDP.

Useful? Sure!

Nation building? Ha!

By 2020, Australia’s GDP will be around $510,000 billion a quarter and $2 billion will be akin to about 8 hours GDP.

Here’s what elese $2 billion is now days.