See, as i understand it, the banks here do fine (Westpac is run by a Soufefriken woman, so why wouldn't it do fine?), and they don't lend money as easily as the States, so surely the AUD should be doing better than most? MC K-Rudd and DJ Swanney keep rapping to us about how the Aussie economy is doing better than most, but we seem to be doing KAK in relation to pretty much every other currency (most importantly for me, the Yen and the USD). I'm just a simple engineer, but it escapes me why the American dollar would be doing better than the Aussie dollar if their shitty banking system and under regulated finance sector was the one that fucked up in the first place? We have an analyst, an economist, some lawyers and an MBA grad (almost!) among us, can someone please explain? No words longer than 8 letters allowed, and nothing that could be classed as 'finance jargon'.
Shabbat shalom,
Greg
'Aw fack Bruce! Look at it! The fackin' dollar just died in the arse again! There goes Gregs holiday down the fackin' tubes! 'Strewth!'
8 comments:
I won't pretend to understand what the fuck is going on at the moment, but here are a couple of factors that add to it.
The commodities factor: The ozzie economy is heavily based on mining and commodities (as is SA's). Over the last two weeks, peoples perceptions of the global outlook after this financial crisis have deteriorated. Basically they think that we're fucked, and not even China is gonna get us out of this. So there's gonna be a recession, where people are gonna be out of jobs and stop buying all the consumer goodies that they used to buy. Because they stop buying these dinges, there's gonna be less demand for the inputs to make the products (all the metals etc mined in Oz). Thus overseas investors no longer want to invest in Ozzie mines and they sell there shares and take back their money to whatever country they're coming from.
The carry trade factor: I don't know too much about this, so I'm sure Phil can improve on my explanation, but here goes. Carry trade is where investors try and make money out of borrowing cash in currencies/countries with low interest rates (eg USA and Japan), and invest the cash in countries with high interest rates (eg Oz and SA). So if somebody in the states was doing this with the ozzie dollar, they would have to buy AUD and sell USD which would in effect create more demand for ozzie currency, and hence strengthen the ozzie exchange rate. The profitability of this sort of transaction is obviously dependent on what the exchange rate does. People will be hesitent to get into carry trade if there is a lot of uncertainty, and exchange rates are volatile. Carry trade also tends to dry up in times of liquidity shortage like now (this is where i sorta lose the flow and might need some help). So moersa people closed out their carry trade positions the other day and sold off ozzie dollars, which weakened the exchange rate.
The risky economy factor: This sorta fits into both of the above, but with the panic thats happened over the last few days, investors have opted to get out of any high risk areas. I'm not certain about this, but I belive that in terms of of developed economies, Oz is regarded as a relatively high risk, high return economy. So foreign investors have been pulling their funds out of oz.
The exchange rate should recover a bit once the major panic selling is over (hopefully mid next week), but not to anywhere near where it was before. When are you having to pay for your trip?
Nice one. I almost feel i owe you a consultancy fee for that. I go to Japan end of next week, but Cambodia is only on the 1st of November. Its mostly USD for accommodation etc in cambodia, so hopefully things will have settled out by then.
stop whining man. you are going to japan for a week. that rocks.
oh ja, if you really need to know. to add to paul's reasons... As we all know the main problems are being experienced by US banks. US banks own many many foreign assets, in the trillions of dollars. There is a major liquidity shortage right now becasue banks no longer trust each other enough to lend to each other (cos none of them really seem to know how badly exposed they are to stinky assets). In a liquidity crisis, you are forced to liquidate as much as possible. When you liquidate, you are selling (mainly financial) assets for cash, often at woefully low prices (but what choice do you have?). The proceeds of those sales result in a higher demand for dollars, and so the dollar strengthens. It has nothing to do with US economic fundamentals, or the US financial system, which are all fucked, or the fundamental of victim currencies, which are often better (but not much).
If the yen is strengthening too it must mean there are lots of yen-denominated assets out there currently going through the liquidiser.
So you have a strengthening dollar and yen. On top of that you have countries like SA and Oz (and NZ, Iceland, Turkey, Brazil, etc) with rather hefty current account deficits. The current account is the widest definition of your internatioanl goods and services trade). These are sustainable as long as foreign capital flows into the country (so the capital account is in surplus, offsetting the deficit on the current account, maintaing overall balance in the Balance of Payments. As long as that balance is there the currency will remain stable).
When inflows of foreign capital start to slow or reverse, that current account deficit becomes a major threat to macroeconomic stablility (bacause your Balance of Payments is no longer in balance). The natural adjustment mechanism is the exchange rate (if it is floating), which weakens to make imports more expensive in domestic currency terms and exports cheaper in foreign currency terms. So balance is restored through adjusting the current account.
In short, in a liquiduty crunch of global proportions, smallish economies with large current account deficits will experience currency weakness.
Got it? It's a double whammy right now. One only wonders why the ront and oz dollar haven't weakened more quickly. Those Icelandic fuckers are screwed already. Turkey is close. Kiwis should be tanking soon too.
I think Phil is just trying to get in on that consultancy fee that you offered me. Ignore him, he's talking shit... I'll send through my bank details now-now.
Howzit! So I didn't know that you were going via Cambodia! That rocks. No matter what the exchange rates kids will still chat "one dolla, one dolla!" x
Ja, I had to go to the UK for work in November anyway, so i will use the stopover in Bangkok to fly over to Phmon Penh (air asia $180!) which makes for a chip chip holiday for me! I was thinking of tying on a few weeks holiday to my japan trip, but i'm kind of glad i didnt now that the dollar has died in the arse.
Kampot pepper crab in Kep here i come!!!
Ps. Alex you owe us a blog post!
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