Judging by recent speeches and comments, the RBA is clearly wondering why the value of the Australian dollar hasn’t fallen after that 4.7% dip on our terms of trade in the final quarter of 2011.
From comments from the likes of Governor Glenn Stevens, senior RBA officials have expressed some modest surprise that the value of the dollar has remained strongly above parity with the US currency since late last year.
In fact we can blame demand from foreign central banks and other big investors for the Aussie dollar remaining high in the face of the slip in our terms of trade.
But since the start of March, the currency has started falling, and this week had slipped sharply, despite an improvement in market conditions in the wake of Greece’s bailout.
The Australian dollar is losing value at a time when it should be rising.
There’s a very real chance it could dip under parity with the US dollar in the near future, and how long it stays there is very much uncertain.
But the days of forecasts for a climb to $US1.20 are over.
The only thing that could stop the weakness gathering strength is a surge in global oil prices from an eruption of Middle East tensions, with Iran the key.
But a sustained dip under parity for the Aussie will ease pressure on much of manufacturing, inbound tourism and the federal budget.
It will come and could be around for a while thanks to the rebound in the US economy and the soaring US gas production, which is changing the global energy picture much faster than any one thought.
In last week’s AirWeekly I wrote the rise in the greenback would come slowly, but the impact of the rising ride of US gas production seems to be out in front of where the currency is heading.
After riding out the volatile period from December through January and into February, thanks to those doubts about Greece and the eurozone, the Aussie has lost ground, especially since Greece’s future was assured for the time being last week.
The dollar hit a seven week low Thursday at around $US1.0450, and has fallen 4% since early this month when it hit a recent high of just over $US1.0815.
It traded above $US1.05 in New York overnight Thursday.
The fall has come despite the obvious improvement in world markets, the solid rebound in the US markets, the ending of the Greece default fears for now, and a fall in volatility.
And, if anything, the past couple of weeks (apart from Wednesday of last week when markets fell on those fears about Greece), sentiment has been more towards ‘risk on’ investing, which is normally a good time for the Aussie dollar when it is in greater demand from carry trade investors especially in Europe.
Instead the US dollar is in demand for a variety of reasons led by the turning economy and falling unemployment.
Yields on US 10 year bonds hit 2.29% overnight Wednesday and ended at 2.28%, the highest for seven months.
That’s despite the current campaign of the Fed to force down long term rates and hold them there.
US bond yields are rising because the economy is looking better and short-sighted US investors are worried about higher petrol and oil costs boosting inflation. The Fed says that will happen, but will only be temporary.
US mortgage rates have risen sharply as well in the past month, putting in doubt the modest recovery in housing demand in the US.
Gold prices have plunged as well, losing more than 4% or well over $US60 an ounce since the start of this week on the ‘good times’ are back for the US economy.
Gold bugs seem to be ignoring the story that those inflation fears are returning to haunt markets.
The weakening in the dollar is showing up in the way our stockmarket is performing: it’s out of step with much of the rest of the world.
The ASX 200 index is still only 11% above the low it set on September 26 as Europe’s sovereign debt crisis re-emerged as a concern.
The Dow average has risen by 24% since October 3, the MSCI world index is up 21.8%, and European and Asian markets are up solidly.
Apple shares are up 10% in March so far alone!
Tokyo is up more than 20% so far this year as the yen continued to fall against the US dollar.
The yen is down 7% over the past six weeks or so after the Bank of Japan added more spending to its easing plan and set an inflation target of 1% for the first time (See Japan story below).
European shares have done as well as our market, up 11% and they have real problems coping with a recession in many countries.
Driving the dollar lower is a worry about the future level of Chinese economic growth and therefore demand for Australian commodities.
At the same time, it is becoming more apparent that global pries for our key exports of coal and iron ore have peaked and are now weakening.
And it’s not just softer demand and rising supplies of these commodities that is pressuring prices lower: the surge in US gas production is playing a major part.
Iron ore prices are currently around $US140 to $US143 a tonne, down sharply from the $US183 of a year ago.
Coking coal prices are now around $US206 a tonne, against more than $US280 a tonne a year ago (after the Qld floods and the iron ore problems in WA).
Thermal coal prices have plunged 30% or more to around $US105 a tonne as surplus US coal is dumped on world markets.
Because thermal coal and soft coking coal are fungible to a degree, the fall in thermal coal prices will tug coking coal prices lower in coming months.
That will continue until the supply/demand balance in the US is stabilised, especially in the power industry.
Cold weather next
