Is Australia in trouble?
With international currencies enduring tough markets, Australia might see rough times ahead, says blogger Andrew Barnett.
China I keep hearing is not going to have a hard landing and the Chinese government has the firepower to control its economy reasonably well. But if you look at the facts as they are now, the so called soft landing China is having isn’t so soft at present. Import growth in July sharply declined, it’s manufacturing sectors have been contracting for multiple consecutive quarters and industrial production grew at the slowest pace in three years according to the data last month. Commodity prices continue to weaken dipping again as the demand for resources in China slows. Industrial production in China is the major contributor to commodity demand and right now iron ore and coal prices are at their lowest levels in two-and-a-half years. While it’s come off its highs, the good old Aussie dollar has kept surging after every sell off. It’s essentially been above parity for the best part of 18 months. Dipping on the rare occasion under $1.00 only to be driven back higher by Central Banks looking for a safe haven carry trade.
I want to quote my favourite commodities analyst Stephen Wyatt who said in the Financial Review recently. “Australian commodity prices and Australia’s terms of trade are unravelling. Iron Ore prices have fallen 25 percent since April…..Coking coal prices have more than halved since the bubble high in 2008…..The import issue is that every surge in the terms of trade, whether in 1952, 1975 or 2012, was followed by a sudden and sharp collapse. Sadly, a reversal is under way already…..The terms of trade are telling us that the declines of the next year or so are likely to be sharp.”
I think Stephen is adding weight to my theory “something’s gotta give”. The charts certainly say it and the fundamentals are screaming it, the Aussie dollar should shift back lower. The key question will be if the carry traders have the courage to hang on or capitulate as the terms of trade for Australia and commodity prices continue to show the way.
I think that all governments are the masters of deception and some are certainly better than others. For the Aussie dollar to shift higher, commodity prices need to rally and interest rates need to be maintained at current levels. I can’t see either of these things happening based on the current world growth fundamentals and over the medium to longer term I see no reason why the Aussie dollar won’t drift back to $1.00 and into the .90’s.