Aussie Losses Moderate as Central Banks Unveil Stimulus

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Peter Lavelle - 20.09.2012

Changes in The Aussie during the 13th to the 20th September 2012.

  • GBPAUD: 1.5413 to 1.5576
  • USDAUD: 0.9483 to 0.9635
  • EURAUD: 1.2314 to 1.2494

Once again the Australian dollar bites the dust!

As you can see above, the antipode currency lost out against the pound, US dollar and euro last week, as concerns about a slowdown in China, as well as Australia's mining boom, continued to weigh on confidence Down Under.

This extends a trend we've been seeing for some time, ever since doubts crept in that Australia might not be able to ride out the global economic slowdown untouched, as to date it has.

However, that said I must admit the Australian dollar has fared better this week than in some time (that it to say its losses have been more moderate) as announcements of stimulus from both the US Federal Reserve and Bank of Japan give global sentiment a lift.

That kept the Aussie currency from bleeding even more heavily, even if neither announcement reflects directly on Australia.

What's Helped the Australian Dollar This Week

As I mention, it's been a game of two halves for the Aussie this week, with economic tidings out of China and Australia pulling the currency lower, even while the unveiling of global stimulus packages keep the AU dollar from falling too far.

Let's look at the measures announced in the United States and Japan first.

The US Fed Throws The Kitchen Sink at Unemployment

If this global economic slowdown has taught us anything, it's that the world's central banks are much more determined to stave off a crisis than governments (or at the least, they're doing a lot more to try and stop one, even if their success to date has been limited.)

This week for instance, the US Federal Reserve announced its most ambitious project yet, a promise to inject unlimited funds into the US economy until such time that, first, unemployment falls, and second, the economy is growing at a decent pace.

The specifics of the scheme involve buying $40bn in mortgage-backed securities each month.

However, this is really an attempt on the Fed's part to throw everything and the kitchen sink, at what it sees as stubbornly high joblessness and a lacklustre recovery.

If there was ever an experiment to test whether central banks are truly the economy-moving entities they're often made out to be, this is it.

The Bank of Japan Launches Its Own Surprise Stimulus

By contrast, the Bank of Japan latest injection of stimulus is a lot less heroic. It amounts to just US $126bn (or three trillion yen) in an attempt to boost growth, and reduce the value of the stubbornly high yen.

(In case you didn't know, Japan has an economy heavily dependent on exports to thrive. Hence, if the yen is expensive, that impedes growth in a big way.)

However, the announcement nonetheless moved the rates, chiefly because it was unexpected. Japanese Finance Minister Jun Azumi for instance noted that the Bank of Japan "took more action than we anticipated".

How Does This Affect The Australian Dollar?

Of course, you might be saying to yourself at this point, "I'm sure that's great for the United States and Japan, but what does it have to do with the Australian dollar?"

Well, the Aussie is a commodity currency, meaning that traditionally its value fluctuates a great deal depending both on the price of commodities and global sentiment.

What these announcements out of Japan and the US have done is lift global sentiment, which encourages the markets to invest in currencies you might call more exotic, like the Australian dollar.

What's Hindered The Australian Dollar This Week

Crucially though, these global stimulus packages haven't helped the Australian dollar gain value against its rivals this week, but merely moderates its losses. That tells us there are factors out there that've had a bigger impact on the Australian dollar, and that the tide has been against the antipode currency. What are they?

Well, chiefly we're looking at reports that China's manufacturing sector contracted for an eleventh straight month, which bodes ill for Australian growth prospects, as well as yet more black clouds hanging over the mining sector. Let's look at these one at a time.

How Does This Affect The Australian Dollar?

If the Australian dollar continues to slide, as looks likely, that makes buying the antipode currency increasingly inexpensive. If you plan to relocate to Australia then, or buy property Down Under, that would be to your benefit.

China's Manufacturing Sector Continues to Languish in Recession

China's gargantuan manufacturing sector shrank to 47.8 in September according to HSBC, the eleventh contraction on the trot (in these surveys, figures above 50.0 indicate growth, while figures beneath 50.0 mean contraction.) This is to say China's manufacturing base has been getting smaller for almost a year now.

Broadly speaking, this is because the global demand to keep China expanding just isn't there. If the world doesn't want what China's selling, it has no choice but to let its factory floors sit empty for a while.

How Does This Affect The Australian Dollar?

That brought down the Australian dollar meanwhile because, while China is selling its manufactured products to the world, Australia has been selling its raw materials to China, to help the Asian tiger fuel this conveyor belt. So if China can't sell its products, Australia can't sell its commodities. That in turn has a knock-on effect on the Aussie dollar.

In addition, there's no particular evidence that China is going to pick up the pace any time soon. NAB currency strategist Ray Attril notes for instance "there doesn't seem to be any bottoming out in the growth rate in China."

Because of this supply chain reaction then, that could keep the Australian dollar under pressure for the foreseeable future.

Australia's Mining Boom Looks Set to Peter Out

Last but not least, and closely connected to what's happening in China, are concerns about Australia's mining boom.

The expansion of Australia's resources sector has been almost wholly responsible for keeping the country out of recession since 2008, given serious injuries to manufacturing and tourism owing to the strong Australian dollar.

However, with China down and out, it seems this last bastion of Australian growth is itself succumbing to the inevitable. Mining giant BHP Billiton shelved two multi-billion dollar projects this week, as the price of iron ore falls 30.0% compared to mid-June, making them no longer profitable. Meanwhile, countless other projects in the pipeline look set to be put on hold.

This has hurt the Australian dollar because, frankly, without mining, there's a real possibility that Australia could join the rest of the developed world, and succumb to recession.

What's Going to Happen Next to The Aussie

So the Australian dollar has been losing out, and the only reason its losses weren't greater this week is because of intervention from the Federal Reserve and Bank of Japan.

Given that, in my opinion, it's easy to see the antipode currency continuing to fall in the next week. This is because the impact of these stimulus announcements will only last so long, whereas the problems facing Australia are much longer-term.

Of course, if you plan to buy Australian dollars in the near future, that can only be to your benefit, as the currency weakens.

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