And if you’re into betting on currency moves, then this one could run and run. The Reserve Bank of Australia (RBA) will probably cut interest rates by 100 basis points next Tuesday. If it does, there’s every chance that the Aussie dollar will get hit harder as hot, yield-chasing money flies out of it looking for a better, safer place to stay.
With the base rate currently at 5.25 per cent, the RBA has more room to cut, whereas there is less room to go till zero in the major economies, as the chart shows.
You could say that even if the RBA slashes 100 basis points, interest-rate differentials will still be in Australia’s favour. But consider that the spreads will be narrowing and capital is likely to flow to “less risky” currencies.
And let’s not forget that the trend recently has been for central banks to surprise by cutting more than expected. A bigger cut could really trigger off a run on the Aussie.
Don’t take my word for it, by the way. This isn’t a trade recommendation – and it’s bound to be a volatile little ride. In fact, the dollar is already bouncing after yesterday’s sell-off.
[If you’re looking for a way to play the unrivalled excitement of the current Forex climate, then I’ll tell you about a great one in a moment.]
But let’s get back to the back-story…
Poor old Australia.
A year ago, everything was looking so positive for the commodity-rich country. In fact, it all looked a little too good.
Gold, iron ore, uranium prices were all going through the roof. China was beating down the doors to get hold of Australia’s vast reserves of natural resources; the economy was in danger of overheating; newspapers talked about a return to the unsustainable growth and rampant inflation of the early 1970s.
Twelve months and a commodity price crash later and Wall Street has turned against Australia. Three major investment banks have come out this week to pronounce it on the critical list. It’s another victim of the credit crunch, they say.
Goldman Sachs and Merrill Lynch analysts say the Australian economy is already slumping. They say that things will continue to get worse well into 2009 and are now predicting recession. According to ABN Amro, economic growth is close to zero.
Why the turnaround? Well, you can start with the deterioration in global growth outlook, particularly in Asia. China is one of Australia’s key trading partners. Economic growth in the Asian giant has slowed from 12% a year ago to just below 9% now.
And it gets worse. The International Monetary Fund’s latest estimate for 2009 is 8.5%, while the World Bank is predicting 7.5%. This huge slowdown points to less demand for Australia’s resources, and less growth for Australia.
The second main reason for Australia’s current slowdown is the actions of the central bank. In its attempts to remove the threat of an overheating economy, and to bring inflation under control, the RBA went all out, aggressively raising interest rates from 2006 till now.
Except they’ve gone too far. And now the economy is looking like it’s heading into recession like the rest of us.
So why then are so many Aussies returning home? Surely it’s not just for the beaches and barbecues.
Well, things may be a lot less rosy than a year ago. But it’s all relative.
Australia is slowing, that much is clear. But it still remains a lot better positioned than many other major economies, including our own.
As the chart shows, growth forecasts for the major world economies have been downgraded over the past year. And the same goes for Australia.
But it also shows Australian GDP growth is expected to remain well above that of the likes of the US, UK, eurozone and Japan.
Worst of all the major economies is the UK. Unemployment is rising, City bonuses have dried up, property values are slumping. The country, as my colleagues at The Fleet Street Letter say, is going bust.
It’s little wonder, then, that Australians are flying out of the UK in the biggest numbers in 30 years. They’re looking for a better place to stay – a place called home.
Regards,
Frank Hemsley
For Fleet Street Daily
P.S. You’ve probably seen that there are huge moves going on in the Forex or currency markets right now. The pound has lost nearly 25% of its value against the US dollar this year and 15% against the euro. The Japanese yen has gone up 15% against the US dollar. And the Australian dollar has fallen 33% against the American currency in the last four months – that’s a move of some 3,300 spread betting points!
This is possibly the most exciting time I’ve ever seen in the Forex markets. I’m often asked if we are bringing back our popular Forex Profit Alert service. I regret there are no plans. But the highly successful UFXP is, for a short time (until 30 November), available at a great new offer. You can try it out totally risk-free for 30 days here.
“This economic downturn is brilliant!”
BY BEN TRAYNOR
Not everyone is hating the recession. Admittedly, those who are getting something from it tend to include the moneyed. There’s a bit of adventure in cutting back…in “making do”. Just so long as it stays pretend, right?
It reminds me of those students who “slum it” for three years at university, and then join a high-flying law firm. So I was surprised yesterday to find that my own mother (not exactly landed gentry – and she won’t mind me saying!) is among those benefiting from the gloom
“This economic downturn is brilliant!” she said when I phoned her. “I’m on Northumberland Street doing some Christmas shopping. All the shops are doing discounts. It’s great!”
I countered that, in the grand scheme of things, this was hardly a positive sign. Discounts, after all, are the first means by which deflation makes itself known.
“Never mind all that,” she said. “I made do with next to nothing all the time I was bringing you up. Now it’s my turn to be able to buy a few things, and I’m going to make sure I enjoy it!”
I can’t really argue. None of us can fix the economy. But we can make the best of what we’re faced with.
The Daily Reckoning – We Are All Turkeys
BY BILL BONNER
The turkeys’ revenge...
“Until today or tomorrow, the typical turkey enjoyed a fairly decent life...” commented our friend Nassim Taleb, in Zurich yesterday.
Yesterday, the stock market was quiet. The Dow ended up 36 points. Oil held at $50. Gold too... it stayed right where it was, at $820 an ounce.
But the slaughterhouses and gold mints worked overtime.
“You can understand how fraudulent most economic analysis is,” Nassim explained, “just by looking the life of the turkey. The animal is fed for 1000 days... and then it is killed. So, if you plotted out the turkey’s life on a chart, it would look great for 1,000 days... each day, the food arrived reliably, and each day, the turkey gained weight. The turkeys would look around and say they were enjoying growth and a bull market. Momentum investors would see it as an opportunity. The quants would run linear regressions on the data and prove that the risk was minimal. ”
Then, come Thanksgiving, and all of a sudden, something goes wrong. Alas, all the turkeys’ theories, models, and conceits were for the birds...
You can read today’s issue of The Daily Reckoning in full here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
