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Home > Global Investing
 
The Aussie dollar gets slammed

7 May 2012

The reserve bank of Australia, or RBA, has vindicated my bearishness on the Aussie dollar and economy, argued ad infinitum in this column for the past two months, by slashing its policy rate from 4.25 per cent to 3.75 per cent. This was double the rate cut priced into the financial markets.

The RBA has basically undercut the high premium argument for the Aussie dollar at a time when it is at least over valued by 25- 30 per cent against the greenback on a purchasing power parity basis. The economy of the lucky country will tank, as the mining boom ends. Why else would the RBA cut interest rates by the biggest amount since 2009?. This means the Aussie is going to be toast, if even if the US dollar is flat against the euro (I doubt this will happen. Why? Hollande in the Elysee Palace and the Greek election). It is significant that the RBI cited lower CPI and housing to explain its rate move. This means this is not the last RBA rate cut. The RBA wants the Aussie dollar lower. And guess what? The gromes of Canberra will succeed. Aussie dollar will fall below parity.

It is iconic that sterling rose as high as 1.6275 (Cable) and higher against euro/ Swissie, even though the British economy contracted in two successive quarters, the technical definition of recession. In essence, the currency market agrees with the Bank of England MRC’s consensus that inflation data precludes another gilt purchase program. Safe haven flows into the gilt market from sovereign reserve managers have definitely helped sterling, as have Bernanke’s dovish comments after the FOMC statement. Yet sterling will have a hard time rising above 1.65 as Britain faces recession for the first time since Mrs Thatcher a time when public spending is being slashed even as oil prices mean a higher CPI than the central bank ‘s two per cent target. British exports will naturally fall on the euro recession and the Chinese slowdown yet Governor King and the MPC are far worried about the 3.5 per cent CPI. Like the Swissie and Nokkie, sterling is now a haven currency.

I believe Asian currencies offer some of the world’s most attractive currencies. I am gaga over the South Korean won, Taiwan dollar and even the Singapore dollar now that the MAS has turned hawkish in its latest conclave. Taiwan’s exports correlate with the Silicon Valley tech export cycle even as the Taipei central bank has turned hawkish, which normally means it engineers a higher Taiwan dollar.

In any case, when inflation rises (as it does now), the Taiwan central bank (called the Central Bank of China) makes sure that the island state’s currency does not get slammed against the dollar. I would only accumulate the Taiwan dollar at 1.2950 but believe we can rise as high as 1.2800. Oil, inflation, weaker exporters, no imminent rate hike leads me to believe the South Korean won depreciates to 1.150-1.160 against the dollar in the short term.

The Syrian pound has lost 50 per cent of its value since the revolution against the Baathist regime became last March 2011. This means Syria faces a banking meltdown, currency collapse and possibly hyperinflation. EU sanctions and attacks on pipelines have hit Syrian oil and gas exports. Banks, corporates and currencies all over the Arab world, particularly in Lebanon, have yet to disclose losses in Syria.

 

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