Sunday, June 19, 2011

Concern over the AUD

The Aussie dollar has maintained its above USD parity levels for some time now.  Given Australia's reliance on imported consumer goods, this has raised many concerns.

Now it appears that the actions of foreign central banks might be another factor to consider. The Russian central bank recently bought $4.7billion of AUD.  It seems that our relatively good economic performance is  attracting a fair bit of attention.

There are suggestions that the RBA might want to intervene to take the pressure off the AUD, and indeed their current dealing reflect concern over the high value of the dollar.  Maybe this a partly a factor in their fx dealings, but it doesn't appear to be (see chart below for RBA fx dealings).

The question comes down to whether we choose to buffer our domestic firms from foreign economic upheaval, or are we ‘all in’ in this global economy game?

I think a reasonable middle ground is to support a mining resource tax and a sovereign wealth fund to balance our economy.  I recently suggested that Quarry Australia was not a desirable place to be, and some type of counterbalancing policy would be inherently stabilising.

Whether this would have much of an impact on the AUD I don’t know. But another part of me thinks – stuff it. Go all in. AUD to $1.25+. The non-mining sectors of the economy will get the shake up they really need to improve efficiency and competitiveness in the long term.   You see I wasn't thinking long term.  Maybe short term pain would give productivity the jolt it so desperately needs.

But of course, there are real people's lives to consider as well, and shake-ups like that are painful. 

The other argument to consider is that Australian businesses benefit when foreign markets are booming, so why not let them face the risks when foreign markets are failing?

Given the high probability that any government intervention will be an ineffective mess anyway, maybe we should just let the market function for a while.

There are plenty of questions, but unfortunately no easy answers.   Expect much more debate on this situation in the coming months.


  1. Problem is the Gov't doesn't have the guts to capitalise on our resource boom properly

  2. "I think a reasonable middle ground is to support a mining resource tax and a sovereign wealth fund to balance our economy"

    here here!

  3. CK I don't think you would get the productivity jolt you desire. Has the rise from .85 to 1.05 given any productivity jolt?
    The problem really is that the rise in the A$ has little to do, directly, with teh economy as such. All that has happened so far is that the rise in the A$ has hidden a multitude of productivity ills. Extra Govt revenue AND ability to borrow has given rise to many inefficiencies in bureaucracy. I suspect the mining tax would only produce a similar result. Not more productivity but more waste.
    The outlook is dark and gloomy because the sky is full of chickens coming home to roost......Gerard Minack

  4. flawse,

    The value of the AUD is related to our relative economic position. But of course it can be quite detached from actual economic activity. The problem is that real businesses need to use the current exchange rate when they trade, whether it is genuinely appropriate or not.

    I tend to agree that given the current political environment, a mining tax would be wasted. But there's nothing new here, and a recession would force governments to cut staff levels and focus on core activities.

    But I suspect that if the AUD hangs up there around $1.05 for a couple of years, we will see economic adjustments that do improve productivity.

    Also, recessions tend to improve productivity be weeding out the least productive enterprises. Unfortunately, this comes at a massive economic and social cost, and whether we are better off in the long run is definitely not clear.

  5. you know, depending on what happens in the USA it could be longer...