AUD at US$1.70?

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I have written many posts over the years on the difficulties in forecasting exchange rates. An example I often give in class is a quote by our then chief scientist in 2002 saying that the AUD was doomed to fall to US30c because of our overreliance on natural resources. Oops. But as recently as 2009 we had the view that the USD was a safe haven as the AUD fell briefly below 60c. As I say in my classes, fads, sentiment and a lot of other noise drives huge short term volatility in exchange rates. At US$1.10 the AUD is overvalued. However, what happens over the next few months, who knows. When the US defaults next week it is quite possible that the AUD will rise significantly. There are a number of reasons for the historical strength of the USD. Settlement of many trade contracts – oil for example – are done in USD. The majority of trade in Asia is still priced and often settled in USD. It is impossible to know how much extra value this generates for the USD, but it does raise its value. A default would certainly see a more rapid move away from the USD as a means of trade settlement, further devaluing the USD. It is quite possible that the AUD might rise 5-10c in the coming weeks. But sooner or later (maybe later) the US economy will recover, US interest rates will rise, and the AUD will fall back to a more normal level (below parity). Going against this view was a headline in the Age saying the AUD was heading for US$1.50, and this one saying that the AUD is headed for US$1.70 by 2014. If anyone can get me Savas Savouri’s email address I will happily bet $10,000 that the AUD will not get to US$1.70 by 2014 – the loser to donate that amount to a charity of the other’s choice. Would be good to see a hedge fund manager put some of their own money on the line for a change!

One Response to "AUD at US$1.70?"
  1. I’m amazed at the confidence in both parties with respect to the value of the AUD vs the USD.  At some point US default be it currency restructuring, failure to make payment on obligations, or quantative easing to infinity will occur and unless all of western culture in addition to some of the east are willing subsidize the exorbitant way of life enjoyed by the elite (10 years ago it would have been the middle class, but they are not just broke but heavily indebted) of the US the USD as reserve currency of the world is DOOMED.
    When an event of such magnitude occurs, accurate predictions are inevitably a lucky guess.  What is increasingly certain is the role gold will play in the support of global trade.
    Since empires do not willingly relinquish their status, the US will make Machiavelli proud and do everything (without limit) to retain their status.  The more important question from a country’s perspective thus becomes; to whom do you align yourself economically in the absence of being able to acquire sufficient physical gold to be neutral?
    Australia is uniquely positioned to retain good relations with the west while essentially supporting the east in the development of their economies.  At some point, such support may not be looked upon as favourably when the eventual power struggle begins between the powerful but completely corrupt and ineffectual US government and those who are improving daily life for their citizens be it a recent or old phenomenon.
    Having emigrated from Canada, who when push comes to shove will have no alternative but to align themselves with their neighbours to the south, I feel more secure but the politcians whom seem distracted by essentially petty issues may be missing opportunities to improve the country’s long term future.
    While mining is booming it is indeed difficult to snub your revenue generators and job providers by making the necessary decisions to force an improvement in the weaker sectors of the economy.  Painful as it may be it is a time to reduce interest rates (the reduced profitability by the mining exporters will hurt them and government revenues) but it does allow business to cheaply finance tools of productivity.  Tax policy must encorage such behaviour while also ensuring a housing bubble does not further ensue by increasing collateral requirment for buyers.
    Australians like anyone else are all too willing to accept policy that feels and tastes good but re-election should be the last thing on the mind of those who need strong actions in what will undoubtedly be increasingly difficult times.
         

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