What am I missing in Australia’s financials?

October 9, 2008 — 13 Comments

Australian Prime Minister Kevin Rudd today told the nation that aside from super (401ks in American) taking a massive hit, everything else was a.o.k. Our banks are solid he says. We’ll weather the storm etc…

So why did the dollar hit 67cents exactly?

News.com.au says its because London hedge funds think they’ll be a downturn in commodities, the bread and butter of Australia’s exports. And yet, does that really fully explain a drop from near parity at the beginning of the year, to 67c? (at the time of writing, it had gone back to 69c). It was around the 85-89c range when I was in the US late August.

What am I missing in Australia’s financials that our politicians aren’t telling us, probably to prevent panic locally? Something the market knows about, but the media either hasn’t picked up on yet, or isn’t in the loop.

Could it be debt exposure? True that Australian banks are more reliant on depositor funds for lending than those outside Australia, but from a figure I saw earlier this week (possibly in Crikey) 30% of lending capacity comes from inter-bank lending, most of it external, and the big four all have serious roll over issues ahead of them for existing credit lines (roll overs that simply won’t happen because they won’t be able to borrow more money), that will likely restrict their ability to lend. Could this be the pandora’s box we’re not hearing about, but the market is factoring in? that not only could our banks end up in some strife (maybe not terminal), but with a serious reduction in their capacity to lend that will result in a massive decrease in growth in this country, worst still perhaps a recession?

I’m not qualified to answer this question, but she who must be obeyed, who despite working in PR actually has a degree in economics can’t work it out either. It’s like a jigsaw puzzle where you don’t have all the pieces, and without those pieces, you cant work out what the real picture is.

But I do know something: we definitely aren’t being told everything. If things are as great and rosy compared to the US that the media and Government is saying, explain the dollar. Surely if we were in such a great position, and the US was as screwed as everyone is saying it is, then our dollar wouldn’t be plummeting against the greenback, at least as much as it is.

13 responses to What am I missing in Australia’s financials?

  1. Well. Our economy is definitely not in a good shape although it's not as bad as what's been happening in US and in EU. I think one major reason for dropping AUD is that those who invested in AUD from overseas need their money back to ease the pressure there. If they need the money *right now*, they'll be less picky in how much they are selling AUD for. So lots of money flows back overseas to put off the fire. And AUD tanks…

    Well. IANAE (I Am Not An Economist) so maybe someone who really qualify can explain it better.

  2. I was thinking the exact same thing today – I can't quite work it out either. Hope someone can shed some light on this….

  3. Our economy is a minnow amongst a sea of sharks. So we could have absolutely no exposure to the current crisis and still be hit for six. Why? Because our trading partners are being heavily hit we're suffering too. If your buyers have no money, because their lines of credit have dried up, who are you going to sell to? There's no conspiracy, it's just a fact that when there's blood in the water everyone looses a chunk of flesh or two.

  4. fear and volititly .. markets aren't rational

  5. It is really weird that no one is talking about this. This exchange rate drop has really affected a lot of businesses. Australians looking to close deals in US dollars have basically seen the asking price jump by over 30%.

    As well as the commodities issues I suspect that there are some real worries about the Australian housing market. This whole crisis began with inflated housing prices in the US. Property in Australia is very expensive. Very glad I don't have a mortgage right now.

  6. One interesting thing to mention is that this is not only happening to the AUD; many other currencies lost value against the USD over the last two weeks. Even the Euro and the British pound are down by about 5% (which, admittedly, is much less than the AUD) and the NZD by about 10%, while the Japanese yen is up.

    However, the Brazilian real has dropped by almost 30%, and that country is as dependent on commodities as Australia, if not more. There may be a grain of truth to this theory.

  7. my investment banking postgrad friends tell me its directly related to decreasing commodity prices being received by bhp/china etc… i asked this exact question and was told “decreasing commodity prices”

  8. Have a look at the US Dollar Index (explained here: http://en.wikipedia.org/wiki/US_Dollar_Index).

    http://stockcharts.com/charts/gallery.html?$usd

    Clearly the US dollar has strengthened significantly since the recent bottom, in absolute terms (well as absolute as the US Dollar Index gets). Therefore, the decline of the AUD against the greenback needs to be looked at in context.

    Having said that, my understanding is that commodity exports contribute significantly to the balance of trade in the Australian economy. With global commodity prices falling and increasing expectations of significant global growth slowdown, it is not surprising that the Australian dollar is depreciating like this.

    Apparently, a large portion of Australian debt is considered high quality debt by many, based on the grounds that a good portion of Australian debt is held by high income households. However it is apparently also the case that as a nation, our household savings are not too fantastic. It will be interesting see what happens to this “high quality debt” if these high income households suddenly become low or no income households thanks to a surge in unemployment sparked by the commodity slowdown.

    Perhaps this scenario is impossible, but then again, I'm not an economist.

    In any case, maybe at least now, powers that be might recognize the need to diversify our economy using our mineral wealth. Sometimes it makes sense to close the barn doors even after the horse is long gone.

  9. Have a look at the US Dollar Index (explained here: http://en.wikipedia.org/wiki/US_Dollar_Index).

    http://stockcharts.com/charts/gallery.html?$usd

    Clearly the US dollar has strengthened significantly since the recent bottom, in absolute terms (well as absolute as the US Dollar Index gets). Therefore, the decline of the AUD against the greenback needs to be looked at in context.

    Having said that, my understanding is that commodity exports contribute significantly to the balance of trade in the Australian economy. With global commodity prices falling and increasing expectations of significant global growth slowdown, it is not surprising that the Australian dollar is depreciating like this.

    Apparently, a large portion of Australian debt is considered high quality debt by many, based on the grounds that a good portion of Australian debt is held by high income households. However it is apparently also the case that as a nation, our household savings are not too fantastic. It will be interesting see what happens to this “high quality debt” if these high income households suddenly become low or no income households thanks to a surge in unemployment sparked by the commodity slowdown.

    Perhaps this scenario is impossible, but then again, I'm not an economist.

    In any case, maybe at least now, powers that be might recognize the need to diversify our economy using our mineral wealth. Sometimes it makes sense to close the barn doors even after the horse is long gone.

  10. my investment banking postgrad friends tell me its directly related to decreasing commodity prices being received by bhp/china etc… i asked this exact question and was told “decreasing commodity prices”

  11. Have a look at the US Dollar Index (explained here: http://en.wikipedia.org/wiki/US_Dollar_Index).

    http://stockcharts.com/charts/gallery.html?$usd

    Clearly the US dollar has strengthened significantly since the recent bottom, in absolute terms (well as absolute as the US Dollar Index gets). Therefore, the decline of the AUD against the greenback needs to be looked at in context.

    Having said that, my understanding is that commodity exports contribute significantly to the balance of trade in the Australian economy. With global commodity prices falling and increasing expectations of significant global growth slowdown, it is not surprising that the Australian dollar is depreciating like this.

    Apparently, a large portion of Australian debt is considered high quality debt by many, based on the grounds that a good portion of Australian debt is held by high income households. However it is apparently also the case that as a nation, our household savings are not too fantastic. It will be interesting see what happens to this “high quality debt” if these high income households suddenly become low or no income households thanks to a surge in unemployment sparked by the commodity slowdown.

    Perhaps this scenario is impossible, but then again, I'm not an economist.

    In any case, maybe at least now, powers that be might recognize the need to diversify our economy using our mineral wealth. Sometimes it makes sense to close the barn doors even after the horse is long gone.

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