This text is from blog famous currency strategist Joel Kruger .
DEAR AUSTRALIAN DOLLAR – We all know you are headed towards 0.9000 (against the buck) over the coming weeks. Why don’t you just spare us the added drama and be on your way? Sure, you could rally some more up towards 1.0600, and even 1.0700, but you have already done a great job over the past few years and we won’t mind if you chill out a bit. Your country’s economy continues to show signs of cooling (despite what some analysts might say), and you have just come off a week that produced very little to get excited about, with your central bank cutting interest rates, and economic data unimpressive to say the least. Retail sales, current account, building approvals, and PMIs all disappointed, and even the slightly softer than expected GDP was nothing to write home about.
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DON’T BE SO SHORT-SIGHTED – Sure, your Treasurer was out talking up the latest GDP as a triumph relative to the rest of the global economy, but honestly, can’t you see that slowly things are moving in the wrong direction. You might think your economy is ahead, but the reality is that it is well behind the curve. Other central banks have been implementing cutting edge cooler alternative forms of monetary policy accommodation to combat the global slowdown, while your central bank has been slow to react with boring old school rate reduction measures. Sure the economy in the west is holding up alright (maybe), but have you taken a look at the rest of the country. The outlook is far from pretty. Sure the growth in the mining sector has been astounding, but what about some balance? How are the other sectors doing? What happens when the mining sector starts to show signs of a bubble? What happens when China demand just isn’t there anymore?
WE KNOW HOW TO READ BETWEEN THE LINES – OK…so you say this latest employment data is impressive? Cmon man…have you really taken a look? While I do respect the ability for analysts to consistently set you up to rally with very off the ball data estimates, it just isn’t working anymore. True, the headline employment readings were impressive. But we know better. We know how to read between the lines. The reality is that your employment numbers were if anything, extremely disconcerting. The rise in jobs was all part-time, while full-time (which is what is truly important) actually dropped by 4.2k. Meanwhile, the unemployment rate came down, but this is probably not for any good reason. Considering the drop in full-time employment, and factoring the decline in the participation rate, the lower unemployment just might mean that those looking for jobs have lost hope and are discontinuing their searches.
WHAT YIELD DIFFERENTIAL? – Now I know, you will tell me that despite all of this you are a risk correlated asset and offer an attractive yield advantage. But brotha cmon….that differential aint looking so juicy anymore. No one is jumping through hoops for a 3% yield on a currency that will likely decline at a much more aggressive rate. So do your country a favor, and start your trek back down the mountain. I’m sure it will only help to turn your local officials on to the fact that the economy might not be in such great shape after all.
LET’S GET BACK TO REALITY – I remember when your cousin the Euro was so strong just a few years back. There were so many companies at that time showing incredible bottom lines to their businesses. The trouble is that these companies forgot that their profitability unfortunately (in many cases) had very little to do with actual performance and everything to do with the benefit of the currency appreciation. I think you are now doing the same disservice to your economy. Your officials are convinced that your country is relatively immune to the global crisis (citing your strength), and they believe that the local economy is running full steam ahead. But what happens when you pull the reigns in a bit? Perhaps certain humbling realities might set in that will allow market forces to take their proper course.
Thanks so much for taking the time to read this and I very much look forward to your response. PS – I love your people! Please tell them to take advantage of your strength asap and start to invest aggressively overseas.