Home Aussie down under again

Once again it is the latest decline in the Aussie dollar that is attracting most interest in the forex market this morning. After reaching a high of 1.0560 yesterday and looking relatively comfortable, the selling pressure since has been relentless, and in late Asian trading the AUD fell to a low of 1.0420.

Not even a mildly encouraging RBA report on financial stability down under provided any assistance. Also worth highlighting is the Aussie’s continued losses against other major currencies – GBP/AUD has climbed to 1.53 from a mid-February multi-decade low of 1.4556, and EUR/AUD is close to 1.28 (the mid-February low was 1.2133). Asian equities were softer overnight, with the Shanghai Composite again leading the way, down another 2%.

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The sluggish relative performance of both the Australian currency and the Chinese stockmarket are not unrelated – investors and traders share a suspicion that China is experiencing something rather more turbulent than a soft landing. For the month-to-date, apart from the BRL, the Aussie is the worst performer of the major currencies. Interestingly, it is the pound that tops the performance standings – these are rare days indeed!


Oil prices now the biggest growth headwind. Last week’s warning from the International Energy Agency (IEA) that the surging cost of oil now represented a bigger risk to global growth than the European sovereign debt and banking crisis did not generate the publicity it deserved. Brent crude has jumped by 17% this year to USD 126 a barrel, essentially matching the high achieved a year ago; in mid-2008. Brent soared to a record high of USD 146. According to the IEA, Europe is especially vulnerable to this most recent spike in the oil price. It is expected to import USD 502bn of oil this year, which represents 2.8% of GDP. The average price of oil this year in Europe is likely to be higher than it was in 2008 when energy costs were a major burden on the economy. Also, European households are expected to spend 11% of their disposable income this year on heating, lighting, cooking and personal transport, up from 9% in 2011. In Asia, the likes of China, Japan and India are also being severely affected by the more expensive price of oil. Japan is burning a lot more oil to generate electricity these days, with 52 of its 54 nuclear power plants closed in the aftermath of the Fukushima disaster. China has recently lifted the price of both petrol and diesel significantly, which will crimp the spending power of households. Crude oil imports reached a record high last month, up 18.5% YoY. In India, the rising cost of fuel is again complicating the RBI’s monetary policy task, because inflation is climbing once more. Recognising that oil prices at these elevated levels represents a serious economic and financial risk, some of the major players are responding. Saudi Arabia vowed to increase production if necessary, and has described the current price of oil as excessive given the significant inventories of oil and the weak state of global demand. The world’s largest producer is pumping nearly 10m barrels of black gold per day, the highest in decades. In the US, President Obama is at least thinking about releasing oil from strategic reserves, and is suddenly very keen on expanding America’s oil infrastructure. It is clear that there is a premium in oil prices of perhaps USD 15-20 because of the tensions and sanctions imposed on Iran. That said, even if this premium was removed (which seems very unlikely in the near term), the oil price would still be quite elevated, and therefore represent a burden on global growth. Right now, the major advanced and advancing economies are definitely suffering from the high price of energy. Indeed, in some instances, it may be enough to tip some of these economies back into recession.

Dark days ahead for the Dutch. Just six months ago, Dutch Prime Minister Rutte and Finance Minister de Jager were espousing the necessity for exclusion from the eurozone of those sovereigns which flouted Europe’s fiscal rules. In addition, both argued that those which systematically infringe should face tougher sanctions and face losing some autonomy over fiscal policy, and that an independent commissioner for budgetary discipline be established for this purpose. Unfortunately for the Dutch government, it now turns out that they themselves are one of the fiscal transgressors. According to the Netherlands Bureau for Economic Policy Analysis, the budget deficit in Holland could rise to 4.6% of GDP this year, well above the 3% target enshrined in the new fiscal pact. In order to bring the deficit into line, the Rutte government will need to make cuts of over EUR 9bn (1.5% of GDP) at a time when the economy is already in recession. Some members of the government are already revolting against this idea, such as the leader of the Freedom Party, Gert Wilders. Indeed, Wilders is starting a campaign to hold a referendum on Holland’s membership of the single currency. As such, it is no surprise to see Dutch bond spreads widen vs. Bunds over the past couple of months. The bond market is now starting to think that Holland’s AAA rating is no longer justified. As such, further under-performance would not be especially shocking.

The wobbly won. The Korean won was one of the standouts yesterday, gaining over 0.5% vs. the USD to 1134, just after USD/KRW touched a two-month high on Monday at 1141. Still, it’s not all about better risk-appetite on the back of Bernanke’s comments; the won was also supported by a further rise in consumer confidence data. Confidence showed a second consecutive monthly increase after the softness seen late last and early this year. South Korea, more than most, has positioned itself as a major beneficiary of growth in the Asia area (ex-Japan), so is certainly more vulnerable to a potential slowdown in demand from China. Between 2006 and 2011, exports to this area increased nearly 40% in real terms, compared to 23% for Japan’s exports to the rest of Asia. Furthermore, South Korea’s total exports now account for more than 50% of GDP, compared to 42% in 2007. As such, since renewed concerns regarding China’s slowdown emerged at the beginning of last week, the Korean won has been one of the biggest underperformers of the broad major currencies over the past week. This also explains the sensitivity of the won to good news on the domestic front, which at least goes some way to reducing fears of a more sustained slowdown. Growth in the final quarter of last year was the lowest for two years, whilst inflation has moved towards the 3% target (from a high of 4.7% last year), but is presumed to nudge to 3.2% higher in the March data next week. The won’s nearly 50% depreciation vs. the yen from mid-2007 to end of 2008, combined with the limited reversal thereafter, served to secure South Korea’s competitive position in the Asia region. The fears that a slower pace of growth in China will threaten this are valid to a point, but overall the gains made and the ability of the country to cope with the third most volatile major currency stand it in good stead.


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