AdviserVoiceUS dollar Archives - AdviserVoice https://www.adviservoice.com.au/tag/us-dollar/ Financial planner information & financial planner education/CPD - AdviserVoice Thu, 23 Jul 2026 20:30:20 +0000 en-US hourly 1 https://wordpress.org/?v=7.0.2 The mighty US dollar https://www.adviservoice.com.au/2014/12/mighty-us-dollar/ https://www.adviservoice.com.au/2014/12/mighty-us-dollar/#respond Wed, 10 Dec 2014 21:00:00 +0000 https://adviservoice.com.au/?p=34680 The Plaza Accord still stands as the best-known multi-national effort to manipulate foreign-exchange markets.

The Plaza Accord still stands as the best-known multi-national effort to manipulate foreign-exchange markets.

In 1985, the finance ministers of the world’s five most important economies met in the US to solve a problem. Representing France, Japan, the UK, the US and West Germany, they gathered at the Plaza Hotel in New York and their solution become known as the Plaza Accord.

Their concern? An overvalued US dollar, which had nearly doubled on a trade-weighted basis over the preceding five years, largely because the Federal Reserve had raised the cash rate to quell inflation.[1] Their problem? Much of US industry including agriculture was reacting to its loss of competitiveness by lobbying politicians in Washington for tariff protection, while the US was worried that its current-account deficit was swelling. Their answer? The Reagan White House pursued an agreement with these countries to undermine the greenback against the Deutsche mark and yen.

The Plaza Accord still stands as the best-known multi-national effort to manipulate foreign-exchange markets. Perhaps an agreement like this is needed today because the US dollar is soaring again. In fact, the yen is weaker now than it was in 1985 on a real-effective (inflation adjusted) trade-weighted basis – falling to 74.81 on this measure in September this year, its lowest since 1982.[2] But there’s no sign of a new pact, even amid talk of so-called currency wars. Investors can thus expect the greenback to add to its 6% surge since July that has seen it surpass four-year highs when judged on the Federal Reserve’s measure of the US dollar’s strength against widely traded currencies.[3]

It’s easy to explain the US dollar’s spurt– on December 1 it was trading at $1.25 against the euro, $1.56 against the UK pound and 119 yen, a gain of 8%, 4% and 15% respectively from a year earlier. The main driver is that the US economy’s faster growth has boosted expectations that the Federal Reserve will tighten monetary policy by raising the cash rate, at a time when policymakers in the struggling eurozone and Japanese economies are pursuing more promiscuous monetary policies. Investors propel the US dollar when they shift money from euro- or yen-denominated assets into US-dollar securities offering higher returns. It’s likely that the interest-rate differential in favour of US securities will be even larger in two years’ time than it is today. Another boost for the greenback is that the shale revolution has slashed the US current-account deficit to about 2% of output from triple that in 2006. This largely removes a net drag on the demand for the US dollar from the combined activities of importers and exporters. A third propulsion is the haven status of US securities in uncertain times. Higher inflation in the US, though, in theory undermines the greenback but the differential is almost too small to worry about – US consumer prices are rising at an annual rate of 1.3% versus 0.4% in the eurozone and 0.9% (for core inflation) in Japan.

The new era of the mighty US dollar will no doubt prove doubt-edged to the US and world economies. There are advantages for sure, especially for the US, eurozone and Japanese economies. But there are some drawbacks generally tied to rapid surges in the US dollar that investors need to be wary of; namely, pitfalls for the US economy, potential damage to emerging markets with currencies linked, even loosely, in some way to the US dollar and instability tied to the cementing of the US dollar as the world’s premier reserve currency.

Forex markets are notoriously difficult to predict so perhaps the US dollar’s climb will peak soon and all the analysis about what a strong US dollar means will be for nothing. The consequences of currency-induced trade and inflation effects often prove exaggerated because businesses can take cuts in margins and pocket the fatter margins rather than pass onto consumers the full movement in exchange rates. Changes in currency values also have less influence on profits when so much production is based outside developed countries. The US dollar is well short of its 1985 peak when judged against major traded currencies (i.e. not on a trade-weighted basis) so its strength is not the problem it has been in the past.[4] Any attempt at a Plaza-like accord would be harder these days because forex turnover is estimated to be 10 times what it was in 1985.[5] A surging euro would probably be a greater concern for the global economy, anyway, for a strong euro could be enough to send the eurozone into a damaging deflationary spiral. But it’s more likely that investors will focus on what a stronger US dollar means, for the greenback’s surge is well supported by fundamentals.

Plus and minuses

Investors have much to be thankful for if the US dollar keeps rising, even if a sturdier US dollar crimps the US-dollar-value of foreign earnings for S&P 500 companies. A major beneficiary is likely to be the US economy. A mighty greenback could attract so much capital to US-dollar-denominated securities (including US stocks) that long-term interest rates will stay lower than otherwise, even if the Fed is lifting the cash rate. This would mean the Fed has less chance of crunching the US economy as it boosts the cash rate from close to zero to more neutral levels. A stronger US dollar means the Fed would worry less about inflation, anyway, for lower import prices suppress consumer inflation. A rising US currency could even lift the confidence of US consumers, who are enjoying greater spending power due to a drop in the prices of imports and commodities, while some of the capital inflow would be in the form of growth-enhancing investment.

Another advantage is that a higher US dollar helps policymakers in Europe and Japan avoid deflation, their most urgent priority in terms of nurturing the longer-term health of their economies. The sliding euro and dropping yen boost inflation by driving up the prices of imports in Europe and Japan. Another plus is that the higher US dollar helps Japan and Europe trade their way out of their woes by boosting their export competitiveness and lowering appetite for costlier imports. The higher US dollar could thus be doing the world a favour by aiding two large sick economies and the world’s largest economy.

Investors, however, need to be aware of some of the possible drawbacks of a burlier US dollar. The stronger currency could attract so much capital to the US that longer-term US bond yields stay too low. Unconstrained US domestic demand may then re-widen the US current-account deficit and rekindle inflation as a medium-term threat. Thus a situation could arise where a stronger US dollar leads to talk that the Fed will need to raise rates faster than otherwise to stymie inflation and avoid the trade and capital-flow imbalances that bedevilled the world leading up to the global financial crisis of 2008. The opposite, however, could happen, too, when it comes to the Fed’s goal of maintaining price stability. A stronger US dollar could see the US struggle to avoid the deflation taking hold in its trading partners, if the US economy isn’t growing fast enough to generate enough inflation to counter the drop in import prices. If this were to happen, investors may well start to hear talk of another Fed quantitative-easing program, no doubt dubbed QE4.

Then there’s the drag on US exports. Congress, at the prodding of business and unions, could see the falling euro and yen as a currency war that the US is losing. It could take retaliatory steps against imports in consequence. A US dollar at, say, 140 yen could stir protectionism in the US, especially as major US export markets are in such limp condition that the appetite for US goods is curbed anyway.

Dilemmas for decision-makers

Swings on financial markets breed uncertainty and can often lead to global instability, especially when it is the world’s reserve currency that is gyrating. Emerging countries generally tie their currencies to the US dollar, so their trade positions deteriorate as the US dollar soars. China, among other countries, could do without the brake on growth a stronger US dollar threatens via reduced exports as it battles a financial crisis. It at least enjoys some of the benefits from a drop in the price of commodities in US dollars, unlike commodity-exporting emerging countries or Australia. A rising US dollar undermines commodities priced in US dollars because it makes them less affordable in other currencies.

Another problem for the world – and the US – of a rising US dollar is that it cements the greenback’s role as the world’s premier reserve currency, which is a currency that is widely held by governments and institutions among their forex reserves because it is seen as a store of value. While this enhanced status carries the advantages for the US that it reduces interest rates, transaction costs and forex risks and generates seigniorage profits (gains made when the cost of creating money is less than the face value of the money and that new money is used to buy government bonds and thus lower interest rates), it places a dilemma in front of US policymakers. They can either preserve the value of a currency by keeping monetary policy tight enough to keep inflation low or they can supply the extra money the world demands and be troubled by inflation and current-account deficits. US policymakers typically opt for the latter path.

Another problem for the rest of the world is that their banks mostly rely on borrowing in US dollars while their borrowers, in turn, are repaying them in local currency. This currency mismatch, where bank US-dollar liabilities rise with the climbing US dollar, could at the margin lead to instability in the financial sector. The Bank of International Settlements warned in a research paper in 2014 that exchange rates are a key influence on financial stability because of the extent to which local banks borrow in US dollars from global banks, which, in turn, rely on the US money markets for funding. “The pre-eminent role of the US dollar as the currency used to denominate debt contracts” explains why US “dollar appreciation constitutes a tightening of global financial conditions and why financial crises are associated with dollar shortages”, the bank says.[6] Emerging economies with large US-dollar-denominated debts battling slowdowns will not welcome a stronger US currency and the associated tightening of US monetary policy. The Bank of International Settlements estimates cross-border loans to emerging countries reached US$3.1 trillion in mid-2014.[7]

The most appropriate way for policymakers to react to the stronger US dollar, given these concerns? The best thing authorities can do is pursue policies that revive the eurozone and the Japanese economies, for a tighter outlook for monetary policy in these economies would reduce the allure of US-denominated securities. Other than that, they probably should do little if anything. For if officials were to meddle in forex markets, they could trigger unintended consequences. There is no better example of how intervention carries side effects than the Plaza Accord of 29 years ago. It was such a success in terms of lowering the US dollar over the following two years that countries hastily agreed to halt the greenback’s plunge when they signed the so-called Louvre Accord in 1987 – yes, the meeting was held in the Louvre in Paris. But this new pact was too late to stop wider damage, according to many. They claim that the yen’s ascension from 1985 hobbled Japanese exports so much that Tokyo was forced to implement the fiscal and monetary stimulus that led to the poisonous asset bubbles of the late 1980s. The ghost of these bubbles is hovering over the stronger US dollar even today.

Financial information comes from Bloomberg unless stated otherwise.

by Michael Collins, Investment Commentator at Fidelity

[1] Federal Reserve. Foreign exchange rates – H.10. Nominal broad dollar index – Monthly index. The US dollar rose from 35.81 in January 1980 to a peak of 69.2367 in March 1985 on this trade-weighted measure. http://www.federalreserve.gov/releases/h10/summary/indexb_m.htm

[2] Bank of Japan. Main time series statistics (Monthly). 19 November 2014. http://www.stat-search.boj.or.jp/ssi/mtshtml/m_en.html

[3] Federal Reserve. Op. cit. Foreign exchange rates – H.10. Nominal major currencies dollar index – Monthly index. The US dollar rose from 76.3331 in July to 80.8267 in October on this non-trade weighted measure of how it has fared against major traded currencies. ttp://www.federalreserve.gov/releases/h10/summary/indexn_m.htm

[4] Federal Reserve. Op. cit. On the Fed’s nominal major currencies dollar (monthly) index, the US dollar peaked at 143.9059 compared with 80.8267 in October this year.

[5] Capital Economics. Global Policy Watch. “Is there a case for another Plaza Accord?” 7 November 2014.

[6] BIS Working Papers No 458. “Cross-border banking and global liquidity”. Valentina Bruno and Hyun Song Shin. August 2014. http://www.bis.org/publ/work458.pdf

[7] BIS quarterly review December 2014 – media briefing. 5 December 2014. http://www.bis.org/publ/qtrpdf/r_qt1412_ontherecord.htm

]]> The Plaza Accord still stands as the best-known multi-national effort to manipulate foreign-exchange markets.

The Plaza Accord still stands as the best-known multi-national effort to manipulate foreign-exchange markets.

In 1985, the finance ministers of the world’s five most important economies met in the US to solve a problem. Representing France, Japan, the UK, the US and West Germany, they gathered at the Plaza Hotel in New York and their solution become known as the Plaza Accord.

Their concern? An overvalued US dollar, which had nearly doubled on a trade-weighted basis over the preceding five years, largely because the Federal Reserve had raised the cash rate to quell inflation.[1] Their problem? Much of US industry including agriculture was reacting to its loss of competitiveness by lobbying politicians in Washington for tariff protection, while the US was worried that its current-account deficit was swelling. Their answer? The Reagan White House pursued an agreement with these countries to undermine the greenback against the Deutsche mark and yen.

The Plaza Accord still stands as the best-known multi-national effort to manipulate foreign-exchange markets. Perhaps an agreement like this is needed today because the US dollar is soaring again. In fact, the yen is weaker now than it was in 1985 on a real-effective (inflation adjusted) trade-weighted basis – falling to 74.81 on this measure in September this year, its lowest since 1982.[2] But there’s no sign of a new pact, even amid talk of so-called currency wars. Investors can thus expect the greenback to add to its 6% surge since July that has seen it surpass four-year highs when judged on the Federal Reserve’s measure of the US dollar’s strength against widely traded currencies.[3]

It’s easy to explain the US dollar’s spurt– on December 1 it was trading at $1.25 against the euro, $1.56 against the UK pound and 119 yen, a gain of 8%, 4% and 15% respectively from a year earlier. The main driver is that the US economy’s faster growth has boosted expectations that the Federal Reserve will tighten monetary policy by raising the cash rate, at a time when policymakers in the struggling eurozone and Japanese economies are pursuing more promiscuous monetary policies. Investors propel the US dollar when they shift money from euro- or yen-denominated assets into US-dollar securities offering higher returns. It’s likely that the interest-rate differential in favour of US securities will be even larger in two years’ time than it is today. Another boost for the greenback is that the shale revolution has slashed the US current-account deficit to about 2% of output from triple that in 2006. This largely removes a net drag on the demand for the US dollar from the combined activities of importers and exporters. A third propulsion is the haven status of US securities in uncertain times. Higher inflation in the US, though, in theory undermines the greenback but the differential is almost too small to worry about – US consumer prices are rising at an annual rate of 1.3% versus 0.4% in the eurozone and 0.9% (for core inflation) in Japan.

The new era of the mighty US dollar will no doubt prove doubt-edged to the US and world economies. There are advantages for sure, especially for the US, eurozone and Japanese economies. But there are some drawbacks generally tied to rapid surges in the US dollar that investors need to be wary of; namely, pitfalls for the US economy, potential damage to emerging markets with currencies linked, even loosely, in some way to the US dollar and instability tied to the cementing of the US dollar as the world’s premier reserve currency.

Forex markets are notoriously difficult to predict so perhaps the US dollar’s climb will peak soon and all the analysis about what a strong US dollar means will be for nothing. The consequences of currency-induced trade and inflation effects often prove exaggerated because businesses can take cuts in margins and pocket the fatter margins rather than pass onto consumers the full movement in exchange rates. Changes in currency values also have less influence on profits when so much production is based outside developed countries. The US dollar is well short of its 1985 peak when judged against major traded currencies (i.e. not on a trade-weighted basis) so its strength is not the problem it has been in the past.[4] Any attempt at a Plaza-like accord would be harder these days because forex turnover is estimated to be 10 times what it was in 1985.[5] A surging euro would probably be a greater concern for the global economy, anyway, for a strong euro could be enough to send the eurozone into a damaging deflationary spiral. But it’s more likely that investors will focus on what a stronger US dollar means, for the greenback’s surge is well supported by fundamentals.

Plus and minuses

Investors have much to be thankful for if the US dollar keeps rising, even if a sturdier US dollar crimps the US-dollar-value of foreign earnings for S&P 500 companies. A major beneficiary is likely to be the US economy. A mighty greenback could attract so much capital to US-dollar-denominated securities (including US stocks) that long-term interest rates will stay lower than otherwise, even if the Fed is lifting the cash rate. This would mean the Fed has less chance of crunching the US economy as it boosts the cash rate from close to zero to more neutral levels. A stronger US dollar means the Fed would worry less about inflation, anyway, for lower import prices suppress consumer inflation. A rising US currency could even lift the confidence of US consumers, who are enjoying greater spending power due to a drop in the prices of imports and commodities, while some of the capital inflow would be in the form of growth-enhancing investment.

Another advantage is that a higher US dollar helps policymakers in Europe and Japan avoid deflation, their most urgent priority in terms of nurturing the longer-term health of their economies. The sliding euro and dropping yen boost inflation by driving up the prices of imports in Europe and Japan. Another plus is that the higher US dollar helps Japan and Europe trade their way out of their woes by boosting their export competitiveness and lowering appetite for costlier imports. The higher US dollar could thus be doing the world a favour by aiding two large sick economies and the world’s largest economy.

Investors, however, need to be aware of some of the possible drawbacks of a burlier US dollar. The stronger currency could attract so much capital to the US that longer-term US bond yields stay too low. Unconstrained US domestic demand may then re-widen the US current-account deficit and rekindle inflation as a medium-term threat. Thus a situation could arise where a stronger US dollar leads to talk that the Fed will need to raise rates faster than otherwise to stymie inflation and avoid the trade and capital-flow imbalances that bedevilled the world leading up to the global financial crisis of 2008. The opposite, however, could happen, too, when it comes to the Fed’s goal of maintaining price stability. A stronger US dollar could see the US struggle to avoid the deflation taking hold in its trading partners, if the US economy isn’t growing fast enough to generate enough inflation to counter the drop in import prices. If this were to happen, investors may well start to hear talk of another Fed quantitative-easing program, no doubt dubbed QE4.

Then there’s the drag on US exports. Congress, at the prodding of business and unions, could see the falling euro and yen as a currency war that the US is losing. It could take retaliatory steps against imports in consequence. A US dollar at, say, 140 yen could stir protectionism in the US, especially as major US export markets are in such limp condition that the appetite for US goods is curbed anyway.

Dilemmas for decision-makers

Swings on financial markets breed uncertainty and can often lead to global instability, especially when it is the world’s reserve currency that is gyrating. Emerging countries generally tie their currencies to the US dollar, so their trade positions deteriorate as the US dollar soars. China, among other countries, could do without the brake on growth a stronger US dollar threatens via reduced exports as it battles a financial crisis. It at least enjoys some of the benefits from a drop in the price of commodities in US dollars, unlike commodity-exporting emerging countries or Australia. A rising US dollar undermines commodities priced in US dollars because it makes them less affordable in other currencies.

Another problem for the world – and the US – of a rising US dollar is that it cements the greenback’s role as the world’s premier reserve currency, which is a currency that is widely held by governments and institutions among their forex reserves because it is seen as a store of value. While this enhanced status carries the advantages for the US that it reduces interest rates, transaction costs and forex risks and generates seigniorage profits (gains made when the cost of creating money is less than the face value of the money and that new money is used to buy government bonds and thus lower interest rates), it places a dilemma in front of US policymakers. They can either preserve the value of a currency by keeping monetary policy tight enough to keep inflation low or they can supply the extra money the world demands and be troubled by inflation and current-account deficits. US policymakers typically opt for the latter path.

Another problem for the rest of the world is that their banks mostly rely on borrowing in US dollars while their borrowers, in turn, are repaying them in local currency. This currency mismatch, where bank US-dollar liabilities rise with the climbing US dollar, could at the margin lead to instability in the financial sector. The Bank of International Settlements warned in a research paper in 2014 that exchange rates are a key influence on financial stability because of the extent to which local banks borrow in US dollars from global banks, which, in turn, rely on the US money markets for funding. “The pre-eminent role of the US dollar as the currency used to denominate debt contracts” explains why US “dollar appreciation constitutes a tightening of global financial conditions and why financial crises are associated with dollar shortages”, the bank says.[6] Emerging economies with large US-dollar-denominated debts battling slowdowns will not welcome a stronger US currency and the associated tightening of US monetary policy. The Bank of International Settlements estimates cross-border loans to emerging countries reached US$3.1 trillion in mid-2014.[7]

The most appropriate way for policymakers to react to the stronger US dollar, given these concerns? The best thing authorities can do is pursue policies that revive the eurozone and the Japanese economies, for a tighter outlook for monetary policy in these economies would reduce the allure of US-denominated securities. Other than that, they probably should do little if anything. For if officials were to meddle in forex markets, they could trigger unintended consequences. There is no better example of how intervention carries side effects than the Plaza Accord of 29 years ago. It was such a success in terms of lowering the US dollar over the following two years that countries hastily agreed to halt the greenback’s plunge when they signed the so-called Louvre Accord in 1987 – yes, the meeting was held in the Louvre in Paris. But this new pact was too late to stop wider damage, according to many. They claim that the yen’s ascension from 1985 hobbled Japanese exports so much that Tokyo was forced to implement the fiscal and monetary stimulus that led to the poisonous asset bubbles of the late 1980s. The ghost of these bubbles is hovering over the stronger US dollar even today.

Financial information comes from Bloomberg unless stated otherwise.

by Michael Collins, Investment Commentator at Fidelity

[1] Federal Reserve. Foreign exchange rates – H.10. Nominal broad dollar index – Monthly index. The US dollar rose from 35.81 in January 1980 to a peak of 69.2367 in March 1985 on this trade-weighted measure. http://www.federalreserve.gov/releases/h10/summary/indexb_m.htm

[2] Bank of Japan. Main time series statistics (Monthly). 19 November 2014. http://www.stat-search.boj.or.jp/ssi/mtshtml/m_en.html

[3] Federal Reserve. Op. cit. Foreign exchange rates – H.10. Nominal major currencies dollar index – Monthly index. The US dollar rose from 76.3331 in July to 80.8267 in October on this non-trade weighted measure of how it has fared against major traded currencies. ttp://www.federalreserve.gov/releases/h10/summary/indexn_m.htm

[4] Federal Reserve. Op. cit. On the Fed’s nominal major currencies dollar (monthly) index, the US dollar peaked at 143.9059 compared with 80.8267 in October this year.

[5] Capital Economics. Global Policy Watch. “Is there a case for another Plaza Accord?” 7 November 2014.

[6] BIS Working Papers No 458. “Cross-border banking and global liquidity”. Valentina Bruno and Hyun Song Shin. August 2014. http://www.bis.org/publ/work458.pdf

[7] BIS quarterly review December 2014 – media briefing. 5 December 2014. http://www.bis.org/publ/qtrpdf/r_qt1412_ontherecord.htm

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]]> https://www.adviservoice.com.au/2014/12/mighty-us-dollar/feed/ 0 Inflows on the rise for US dollar ETF https://www.adviservoice.com.au/2014/09/inflows-rise-us-dollar-etf/ https://www.adviservoice.com.au/2014/09/inflows-rise-us-dollar-etf/#respond Mon, 29 Sep 2014 21:50:00 +0000 https://adviservoice.com.au/?p=33085 Investors looking to capitalise on a falling AUD
Alex Vynokur

Alex Vynokur

A growing number of investors are looking to capitalise on a potential further decline in the Australian dollar with trading data from BetaShares, a leading exchange traded fund (ETF) provider, showing significant inflows into its US Dollar ETF in September.

With the Australian dollar hitting seven month lows against the US dollar, BetaShares has seen approximately $30 million of net inflows into the BetaShares US Dollar ETF (ASX code “USD”) since the start of September. The fund is designed to provide exposure to the performance of the US dollar relative to the Australian dollar, meaning the value of the fund will go up as the US dollar appreciates, and vice versa. The fund now has over $200 million in assets under management.

BetaShares’ Managing Director, Alex Vynokur, said the rise in inflows into the USD ETF indicates that many investors expect the Australian dollar to continue its recent decline.

“We are currently seeing a sharp increase in the level of interest in the USD ETF, both in terms of incoming enquiries and net inflows, which seems to reveal an undercurrent of pessimism regarding the Australian dollar,” said Mr Vynokur. “With growing expectations around a potential US interest rate rise, as well as Reserve Bank modelling indicating the AUD is overvalued, investors are taking the opportunity to position themselves to capitalise on a potential long-term decline in the local currency.”

Commenting on the broader take up of exchange traded products in Australia, Mr Vynokur concluded: “As the ETF landscape continues to mature in Australia, there has been significant growth in the number of investors using exchange traded funds to execute tactical positions across asset classes as diverse as currency, commodities and international equities. It’s encouraging to see investors start to fully utilise the low-cost, transparent access that ETFs can provide.”

 

]]> Investors looking to capitalise on a falling AUD
Alex Vynokur

Alex Vynokur

A growing number of investors are looking to capitalise on a potential further decline in the Australian dollar with trading data from BetaShares, a leading exchange traded fund (ETF) provider, showing significant inflows into its US Dollar ETF in September.

With the Australian dollar hitting seven month lows against the US dollar, BetaShares has seen approximately $30 million of net inflows into the BetaShares US Dollar ETF (ASX code “USD”) since the start of September. The fund is designed to provide exposure to the performance of the US dollar relative to the Australian dollar, meaning the value of the fund will go up as the US dollar appreciates, and vice versa. The fund now has over $200 million in assets under management.

BetaShares’ Managing Director, Alex Vynokur, said the rise in inflows into the USD ETF indicates that many investors expect the Australian dollar to continue its recent decline.

“We are currently seeing a sharp increase in the level of interest in the USD ETF, both in terms of incoming enquiries and net inflows, which seems to reveal an undercurrent of pessimism regarding the Australian dollar,” said Mr Vynokur. “With growing expectations around a potential US interest rate rise, as well as Reserve Bank modelling indicating the AUD is overvalued, investors are taking the opportunity to position themselves to capitalise on a potential long-term decline in the local currency.”

Commenting on the broader take up of exchange traded products in Australia, Mr Vynokur concluded: “As the ETF landscape continues to mature in Australia, there has been significant growth in the number of investors using exchange traded funds to execute tactical positions across asset classes as diverse as currency, commodities and international equities. It’s encouraging to see investors start to fully utilise the low-cost, transparent access that ETFs can provide.”

 

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]]> https://www.adviservoice.com.au/2014/09/inflows-rise-us-dollar-etf/feed/ 0 Currency markets heat up, says Instreet https://www.adviservoice.com.au/2014/09/currency-markets-heat-says-instreet/ https://www.adviservoice.com.au/2014/09/currency-markets-heat-says-instreet/#respond Wed, 17 Sep 2014 21:50:27 +0000 https://adviservoice.com.au/?p=32869 George Lucas

George Lucas

Two events are set to grab the most attention this week – the outcome of the US Federal Reserve’s policy meeting and the referendum on Scottish independence. Both are important for currency markets, which is where most of the action has been taking place recently.

Dollar domination

The US Dollar continues to rally boosted by the relative strength of the US economy. We believe this theme has a lot further to run as the divergence widens between the US, Japan and the Eurozone with regards to the outlook for monetary policy.

Further support for the US Dollar came in the form of a technical note issued by economists at the San Francisco Federal Reserve who pointed out that market expectations for the path of US interest rates is lower than that anticipated by the Federal Open Market Committee (FOMC).

This also caused a sell-off in US long bonds with 10-year treasury yields back up to around 2.60% (from below 2.40%) in a matter of weeks.

These events demonstrate the sensitivity of markets to what the Fed has to say after this week’s meeting. The focus will be on nuances in the Fed’s language that indicate any potential amendment to the pledge to keep rates on hold for a “considerable time”.

Looking at recent data – including stronger retail and lending figures as well as lower petrol prices, job growth and easier lending conditions – we expect the market will need to get used to the idea of a sooner-than expected rate rise, most likely in the second quarter of next year.

Scottish referendum

The British Pound has been weakening against the US Dollar driven by shifts in yield differentials and the fall in the Euro.

If the Scots vote ‘aye’ to their referendum for independence this week, there is likely to be further fallout for the Pound. Longer term, there will be other implications across the European region.

China numbers disappoint

Numbers released by China over the weekend were disappointing and likely to lead to more stimulus measures. The poor data included:

  • Lower fixed-asset investment driven by cooling property investment
  • Reduced industrial production driven by a slowdown in infrastructure spending
  • Lower-than-expected retail sales despite recent indicators suggesting the labour market remains strong
  • A slowdown in year-on-year outstanding credit growth – a drop in outstanding social financing from 15.9% y/y in July to 15.1%.

Whilst all these credit indicators are a negative for China in the near term, it’s a good sign that there is a focus on weaning China off its dependence on credit to a more sustainable growth trajectory.

Finally, Australia

A final word on Australia where the economy is still adjusting to a sharp slowdown in mining investment but is doing better than expected. We expect the RBA to maintain its view and keep the target cash rate at its current low level of 2.5%.

With regards to currency, the Australian Dollar is currently the only G10 currency that is up against the USD for the year.

By George Lucas, Managing Director, Instreet Investment

]]> George Lucas

George Lucas

Two events are set to grab the most attention this week – the outcome of the US Federal Reserve’s policy meeting and the referendum on Scottish independence. Both are important for currency markets, which is where most of the action has been taking place recently.

Dollar domination

The US Dollar continues to rally boosted by the relative strength of the US economy. We believe this theme has a lot further to run as the divergence widens between the US, Japan and the Eurozone with regards to the outlook for monetary policy.

Further support for the US Dollar came in the form of a technical note issued by economists at the San Francisco Federal Reserve who pointed out that market expectations for the path of US interest rates is lower than that anticipated by the Federal Open Market Committee (FOMC).

This also caused a sell-off in US long bonds with 10-year treasury yields back up to around 2.60% (from below 2.40%) in a matter of weeks.

These events demonstrate the sensitivity of markets to what the Fed has to say after this week’s meeting. The focus will be on nuances in the Fed’s language that indicate any potential amendment to the pledge to keep rates on hold for a “considerable time”.

Looking at recent data – including stronger retail and lending figures as well as lower petrol prices, job growth and easier lending conditions – we expect the market will need to get used to the idea of a sooner-than expected rate rise, most likely in the second quarter of next year.

Scottish referendum

The British Pound has been weakening against the US Dollar driven by shifts in yield differentials and the fall in the Euro.

If the Scots vote ‘aye’ to their referendum for independence this week, there is likely to be further fallout for the Pound. Longer term, there will be other implications across the European region.

China numbers disappoint

Numbers released by China over the weekend were disappointing and likely to lead to more stimulus measures. The poor data included:

  • Lower fixed-asset investment driven by cooling property investment
  • Reduced industrial production driven by a slowdown in infrastructure spending
  • Lower-than-expected retail sales despite recent indicators suggesting the labour market remains strong
  • A slowdown in year-on-year outstanding credit growth – a drop in outstanding social financing from 15.9% y/y in July to 15.1%.

Whilst all these credit indicators are a negative for China in the near term, it’s a good sign that there is a focus on weaning China off its dependence on credit to a more sustainable growth trajectory.

Finally, Australia

A final word on Australia where the economy is still adjusting to a sharp slowdown in mining investment but is doing better than expected. We expect the RBA to maintain its view and keep the target cash rate at its current low level of 2.5%.

With regards to currency, the Australian Dollar is currently the only G10 currency that is up against the USD for the year.

By George Lucas, Managing Director, Instreet Investment

The post Currency markets heat up, says Instreet appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/09/currency-markets-heat-says-instreet/feed/ 0 Tapering: Where others see risk, William Blair sees opportunity https://www.adviservoice.com.au/2014/02/tapering-others-see-risk-william-blair-sees-opportunity/ https://www.adviservoice.com.au/2014/02/tapering-others-see-risk-william-blair-sees-opportunity/#respond Wed, 26 Feb 2014 20:35:21 +0000 https://adviservoice.com.au/?p=28436 US tapering presents investment opportunities: William Blair

US tapering presents investment opportunities: William Blair

Fears of stability across the globe around tapering are creating significant investment opportunities in countries like India, Thailand, the Ukraine, Venezuela and Argentina, according to William Blair’s Head of Dynamic Allocation Strategies (DAS), Brian Singer.

On a visit to Australia to promote William Blair’s DAS to institutional investors last week, Mr Singer said geopolitical events do not tend to change the valuation of assets or the value of currencies.  “Risks are definitely out there, but the developments are creating opportunities,” he said. “These events significantly motivate prices away from or towards fundamental value.”

Mr Singer said William Blair’s DAS team assesses each individual geopolitical situation, to decide whether the opportunity is adequately compensating for the risk that is introduced. “What we are doing is taking some of the risk away from just being exposed to the market and adding risk that is uncorrelated to the currency,” he said. “India became our largest position when Raghuram Rajan became the Governor of the Reserve Bank of India in August 2013.”

India is still the William Blair DAS team’s largest position due to a significant interest rate differential and because the currency is cheap relative to its fundamental value. “It looks to be a great opportunity going forward, and a great diversifier for portfolios.”

Mr Singer said the first port of call for the William Blair DAS team in deciding to invest in equity markets, bond markets and currencies all over the world, is to determine fundamental value. “We look for prices that revert back to fundamental value over time,” he said. “Within the current geopolitically unstable environment, there are a lot of strategic negotiations and it is important to understand those negotiations and the behaviours of the players as that pushes prices around.“

On currencies, Mr Singer’s said the William Blair DAS team estimates the value of the Australian dollar at about $0.65-$0.70 to the US dollar. “So it’s a long way away from fundamental value,” he said. “We are short and we are short most of the commodity currencies for a number of reasons. First of all because we believe commodity super-cycles have led investors to push prices up above fundamental values and secondly because we see the opportunity for those prices to revert back to fundamental value as commodity prices come down.”

]]> US tapering presents investment opportunities: William Blair

US tapering presents investment opportunities: William Blair

Fears of stability across the globe around tapering are creating significant investment opportunities in countries like India, Thailand, the Ukraine, Venezuela and Argentina, according to William Blair’s Head of Dynamic Allocation Strategies (DAS), Brian Singer.

On a visit to Australia to promote William Blair’s DAS to institutional investors last week, Mr Singer said geopolitical events do not tend to change the valuation of assets or the value of currencies.  “Risks are definitely out there, but the developments are creating opportunities,” he said. “These events significantly motivate prices away from or towards fundamental value.”

Mr Singer said William Blair’s DAS team assesses each individual geopolitical situation, to decide whether the opportunity is adequately compensating for the risk that is introduced. “What we are doing is taking some of the risk away from just being exposed to the market and adding risk that is uncorrelated to the currency,” he said. “India became our largest position when Raghuram Rajan became the Governor of the Reserve Bank of India in August 2013.”

India is still the William Blair DAS team’s largest position due to a significant interest rate differential and because the currency is cheap relative to its fundamental value. “It looks to be a great opportunity going forward, and a great diversifier for portfolios.”

Mr Singer said the first port of call for the William Blair DAS team in deciding to invest in equity markets, bond markets and currencies all over the world, is to determine fundamental value. “We look for prices that revert back to fundamental value over time,” he said. “Within the current geopolitically unstable environment, there are a lot of strategic negotiations and it is important to understand those negotiations and the behaviours of the players as that pushes prices around.“

On currencies, Mr Singer’s said the William Blair DAS team estimates the value of the Australian dollar at about $0.65-$0.70 to the US dollar. “So it’s a long way away from fundamental value,” he said. “We are short and we are short most of the commodity currencies for a number of reasons. First of all because we believe commodity super-cycles have led investors to push prices up above fundamental values and secondly because we see the opportunity for those prices to revert back to fundamental value as commodity prices come down.”

The post Tapering: Where others see risk, William Blair sees opportunity appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/02/tapering-others-see-risk-william-blair-sees-opportunity/feed/ 0 Three Questions for 2014 https://www.adviservoice.com.au/2014/01/three-questions-2014/ https://www.adviservoice.com.au/2014/01/three-questions-2014/#respond Mon, 20 Jan 2014 20:45:17 +0000 https://adviservoice.com.au/?p=27625 Mark Burgess

Mark Burgess

“As we enter the new year, markets are more or less where we left off in December. Investor appetite for risk is up, liquidity is free flowing and credit markets are open for business, certainly from a new issues perspective.

As investors and commentators consider the year ahead it strikes me there are three issues we need to consider: the growth outlook, what a normalised yield curve means for emerging markets, and whether economic growth can drive corporate profit growth.

Is growth going to become embedded in the developed world?

In both the US and UK, economic growth is gaining momentum. In the US, the impact of last year’s fiscal drag is behind us, growth is building and job creation appears robust. The financial system is working with a strongly capitalised banking system lending to the real economy. One could argue that with QE still very evident we should expect no less (stimulus is running at $75bn per month). Nonetheless the US economy looks well placed for 2014 and beyond. UK growth is also taking hold; again private sector job creation is strong, leading indicators are all signalling significant expansion, and the housing market in the south east is particularly buoyant. On the current trajectory we can legitimately consider the need for an interest rate rise this year, something not currently discounted by markets. In Europe, again leading indicators are turning positive (with the exception of France). Even Spain appears to be finally emerging from years of austerity. Certainly peripheral bond markets have been on fire, with yields falling sharply as tail risks diminish. With a more robust global growth environment, policy measures will continue to normalise and long, and in turn short, rates will rise. Implications of this include rising borrowing costs for over-indebted governments and consumers, and a challenging headwind for fixed income investors. It’s also a scenario that lends itself to a stronger $US.

Will tapering, rising bond yields and a stronger US dollar challenge the emerging markets in the way that it did last summer? 

Last year’s car crash in EM debt and equities could be a pre-cursor to a full-blown motorway pile up later this year. Deficit countries more dependent on external financing have remained under pressure since then. Both the equity and debt markets were standout underperformers last year, although equities had a bounce in the second half. The regions’ woes have not been helped by the new Chinese government appearing to want to contain the explosive credit formation facilitated by the shadow banking sector. This has further undermined investor confidence, as has the prospect of a stronger dollar. Nonetheless, if the region can withstand tighter (or at least less loose) US monetary policy, then real value will begin to appear. Bond yields are significantly higher, equity PE ratios are much lower than the developed world and at some stage the region will become attractive. For now though we need to see evidence of stability before considering increasing our exposure.

The final question surrounds the prospects for corporate profits.

Equity markets have clearly performed extraordinarily well over the last few years; the S&P 500 is up by 50%, the Financial Times Actuaries All Share Index up by 33% and the world equity index up by over 40%. Corporate profits have grown, but not nearly as much as markets have risen. So returns have been driven by a re-rating, fuelled by increasing confidence, ongoing central bank stimulus and liquidity provision. For equity markets to progress further we need corporate profit growth to take up the running – it’s unlikely equities can go much further without that happening. Returning then to our first question, if global growth takes hold there is every reason to believe the backdrop for corporate profit growth will be provided, although we will need to be mindful of the impact of falling unemployment on margins given current elevated levels.

There is one final issue to consider. We are nearly six years away from the global financial crisis (although it feels much closer in investors’ memories). Looking at past cycles, history would suggest we are now closer to the next crisis than the last one. Let’s hope that proves not to be the case!”

Comment from Mark Burgess, Threadneedle Investments

]]> Mark Burgess

Mark Burgess

“As we enter the new year, markets are more or less where we left off in December. Investor appetite for risk is up, liquidity is free flowing and credit markets are open for business, certainly from a new issues perspective.

As investors and commentators consider the year ahead it strikes me there are three issues we need to consider: the growth outlook, what a normalised yield curve means for emerging markets, and whether economic growth can drive corporate profit growth.

Is growth going to become embedded in the developed world?

In both the US and UK, economic growth is gaining momentum. In the US, the impact of last year’s fiscal drag is behind us, growth is building and job creation appears robust. The financial system is working with a strongly capitalised banking system lending to the real economy. One could argue that with QE still very evident we should expect no less (stimulus is running at $75bn per month). Nonetheless the US economy looks well placed for 2014 and beyond. UK growth is also taking hold; again private sector job creation is strong, leading indicators are all signalling significant expansion, and the housing market in the south east is particularly buoyant. On the current trajectory we can legitimately consider the need for an interest rate rise this year, something not currently discounted by markets. In Europe, again leading indicators are turning positive (with the exception of France). Even Spain appears to be finally emerging from years of austerity. Certainly peripheral bond markets have been on fire, with yields falling sharply as tail risks diminish. With a more robust global growth environment, policy measures will continue to normalise and long, and in turn short, rates will rise. Implications of this include rising borrowing costs for over-indebted governments and consumers, and a challenging headwind for fixed income investors. It’s also a scenario that lends itself to a stronger $US.

Will tapering, rising bond yields and a stronger US dollar challenge the emerging markets in the way that it did last summer? 

Last year’s car crash in EM debt and equities could be a pre-cursor to a full-blown motorway pile up later this year. Deficit countries more dependent on external financing have remained under pressure since then. Both the equity and debt markets were standout underperformers last year, although equities had a bounce in the second half. The regions’ woes have not been helped by the new Chinese government appearing to want to contain the explosive credit formation facilitated by the shadow banking sector. This has further undermined investor confidence, as has the prospect of a stronger dollar. Nonetheless, if the region can withstand tighter (or at least less loose) US monetary policy, then real value will begin to appear. Bond yields are significantly higher, equity PE ratios are much lower than the developed world and at some stage the region will become attractive. For now though we need to see evidence of stability before considering increasing our exposure.

The final question surrounds the prospects for corporate profits.

Equity markets have clearly performed extraordinarily well over the last few years; the S&P 500 is up by 50%, the Financial Times Actuaries All Share Index up by 33% and the world equity index up by over 40%. Corporate profits have grown, but not nearly as much as markets have risen. So returns have been driven by a re-rating, fuelled by increasing confidence, ongoing central bank stimulus and liquidity provision. For equity markets to progress further we need corporate profit growth to take up the running – it’s unlikely equities can go much further without that happening. Returning then to our first question, if global growth takes hold there is every reason to believe the backdrop for corporate profit growth will be provided, although we will need to be mindful of the impact of falling unemployment on margins given current elevated levels.

There is one final issue to consider. We are nearly six years away from the global financial crisis (although it feels much closer in investors’ memories). Looking at past cycles, history would suggest we are now closer to the next crisis than the last one. Let’s hope that proves not to be the case!”

Comment from Mark Burgess, Threadneedle Investments

The post Three Questions for 2014 appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2014/01/three-questions-2014/feed/ 0 $US breaking down, $A breaking higher https://www.adviservoice.com.au/2011/03/us-breaking-down-a-breaking-higher/ https://www.adviservoice.com.au/2011/03/us-breaking-down-a-breaking-higher/#respond Tue, 29 Mar 2011 04:28:10 +0000 https://adviservoice.com.au/?p=6805

Key points

  • The $A is continuing to push further above parity against the $US, reaching a 29 year high. This reflects a combination of strong commodity prices, $US weakness and high Australian interest rates.
  • Unless the global economy slides back into recession, which appears unlikely, the $A is likely to average above parity over the next few years on the back of strong commodity prices and relatively high Australian interest rates. Expect $US1.10 by year end.
  • On balance a strong $A is positive for the Australian economy, & is part of the adjustment made necessary by strong demand for Australian raw material exports.

Introduction

After being stuck in a narrow range around parity against the $US since last October, the Australian dollar has reached a new 29 year high. The strength in the $A reflects renewed $US weakness, strong commodity prices and relatively high Australian interest rates. My view for some time has been that having breached parity against the $US, the $A would head to $US1.10. Allowing for usual currency volatility this still seems on track.

The bigger picture – a falling $US

First, to the US dollar. A major part of the Australian dollar’s strength over the last decade has been the downtrend in the US dollar. After a pause this appears to be resuming.

Source: Bloomberg, AMP Capital Investors

Further $US weakness is likely. The US Federal Reserve is signalling no urgency to raise interest rates at a time when other central banks are either lifting interest rates or contemplating lifting them. In addition, rising global investor confidence is reducing demand for the US dollar as a “safe haven”. The converse of US dollar weakness is renewed strength in a range of other currencies:

  • The euro is looking stronger on the back of European Central Bank (ECB) talk of a rate hike, and confidence European authorities are confining sovereign debt problems to Greece, Ireland and Portugal.
  • Asian currencies have risen to the top of their recent range against the $US. With the Renminbi steadily appreciating against the $US and interest rates still rising across Asia, it’s likely Asian currencies – including the Korean won, Taiwan dollar and Singapore dollar – have more upside.
  • The Yen strengthened after the Japanese earthquake. This has since been short circuited by G7 intervention, confusing the outlook for this currency.
  • A weaker $US is also likely to coincide with a stronger $A.

Strong commodity prices

Despite a brief dip as a result of the Japanese nuclear crisis, commodity prices have shown renewed strength. This reflects strong growth in Europe, expectations of rebuilding demand for raw materials from Japan, turmoil in the Middle East and North Africa boosting energy prices and expectations Japan’s nuclear crisis will add to demand for oil, gas and coal. With the industrialisation process in China and other emerging countries likely having much further to go and supply likely to continue to struggle to keep up, the uptrend in commodity prices likely has years to run. And, of course, a weak $US is also positive for commodity prices as the latter are priced in US dollars.

Source: Thompson Financial, AMP Capital Investors

Australian commodity exports such as iron ore, coal and liquid natural gas are all key beneficiaries of this. Commodities make up 70% or so of Australian exports and so the strength in commodity prices has seen the ratio of Australia’s export prices to import prices, or the terms of trade, rise to its highest level since the early 1950s and it is continuing to surprise on the upside. As can be seen in the next chart the $A has tended to lag the strength in the terms of trade. The last time the terms of trade was this high, in the early 1950s, the equivalent of one Australian dollar bought $US1.12.

Australia's strong terms of trade supports the $A above parity

Relatively high interest rates

Australian interest rates at 4.75% are well above those in the US, Europe and Japan where the range is zero to 1%. While the ECB is likely to raise rates next month to 1.25%, there is unlikely to be much follow through and the Bank of Japan has been undertaking more (quantitative) easing. Meanwhile the Fed is likely to be on hold for some time. By contrast, Australian rates are on hold but the Reserve Bank’s bias remains towards more tightening which we expect to occur during the second half as Australian economic growth rebounds on mining investment, Queensland production returns to pre flood levels, flood related rebuilding kicks in and as national income remains strong on the back of high commodity prices. By year end the interest rate differential in Australia’s favour is likely to have increased to around 5% against the US and Japan and 4% versus Europe. This has the effect of attracting funds to Australia, which in turn pushes up the $A.

A longer term perspective on the $A

The general consensus seems to be the Australian dollar is way overvalued and that parity and above is unsustainable. By contrast we think parity and above is sustainable. There are several reasons for this.

First, most fair value models for the Australian dollar have been estimated over a relatively narrow period of history, ie the period since the $A floated in 1983. However, this misses the longer term perspective and the changed fundamentals now facing Australia.
Second, most of the factors that drove the long term slide below parity for the $A have now reversed. Back in 1901 the equivalent of one Australian dollar bought $US2.40 and for most of the last century the $A was above parity against the $US. The long term slide in the $A from $US2.40 in 1901 to a low of $US0.48 in 2001 reflected a combination of soft commodity prices and a perception of Australia as a mediocre, poorly managed, inflation prone “old” economy.

Source: Thomson Financial, AMP Capital Investors

However, these drivers have now all turned around. Commodity prices are in a long term upswing and Australia is seen as well managed with low public debt, inflation under control and relatively high interest rates.

Third, the global financial crisis has exposed a fundamental imbalance in the global economy, which is a high level of consumption and/or public debt in major advanced countries in contrast to low consumption and low debt in emerging countries. A part of the adjustment to rebalance the world is that currencies in the US, Japan and Europe need to fall relative to those in the emerging world, and also against currencies that benefit from emerging world growth such as the Canadian and Australian dollars.

In short, it is likely the sub-parity period from the 1980s was an aberration for the $A, and the improvement in Australia’s relative fundamentals suggest it is likely the $A is going to settle above parity against the $US. Forecasting currency levels is an impossible task but I expect an average around $US1.10 is likely in the years ahead, unless the global economy collapses again. This would be consistent with the high terms of trade.

The impact of a rising $A on the economy and shares

The strong Australian dollar is great news for Australian consumers as it will result in lower prices for imported items, notably things like cars, clothing, petrol and many electrical goods. This in turn is likely to take pressure off inflation and reduce the extent to which the RBA will ultimately have to raise interest rates.

For the broader economy and shares, a strong $A is often seen as bad news as export and import competing companies become less competitive. With around 30% of listed company earnings sourced overseas, a 10% rise in the $A will cut earnings by about 3%. This would suggest a rising $A is bad for the Australian share market.

However, the actual relationship between the $A and the Australian share market is ambiguous. In fact, over the last decade a strong $A has gone hand in hand with economic strength and a weak $A has correlated with economic weakness. The reason is because while a rise in the $A is a dampener for company profits on its own, it’s normally associated with strong economic growth which is good for profits. Given the latest bout of $A strength has been associated with renewed vigour in commodity prices and improved optimism regarding the global outlook, it’s unlikely to cause major problems for the share market or the economy at an aggregate level. This is because the direct negative impact on profit growth from the surge in the $A should be largely offset by the positive impact from solid economic conditions. However, the strong $A could remain a drag on the relative performance of Australian shares against global shares.

From a longer term perspective though, the rise in the $A will present challenges. It’s helping to shift economic resources to the strongly growing resources sector of the economy, which is appropriate from a technical economic perspective but such restructuring will invariably have significant social and regional consequences.

The strong $A and investors

For investors, a rising $A reduces the value of offshore investments, unless they are hedged back to Australian dollars. Global bond and property funds are usually hedged to remove the currency impact. Fully hedged international equity funds are available. With the $A likely to see further gains over time, there is a case to remain biased towards hedged international equity funds as opposed to unhedged funds, although not as strong a case when the $A was well below parity.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
]]>

Key points

  • The $A is continuing to push further above parity against the $US, reaching a 29 year high. This reflects a combination of strong commodity prices, $US weakness and high Australian interest rates.
  • Unless the global economy slides back into recession, which appears unlikely, the $A is likely to average above parity over the next few years on the back of strong commodity prices and relatively high Australian interest rates. Expect $US1.10 by year end.
  • On balance a strong $A is positive for the Australian economy, & is part of the adjustment made necessary by strong demand for Australian raw material exports.

Introduction

After being stuck in a narrow range around parity against the $US since last October, the Australian dollar has reached a new 29 year high. The strength in the $A reflects renewed $US weakness, strong commodity prices and relatively high Australian interest rates. My view for some time has been that having breached parity against the $US, the $A would head to $US1.10. Allowing for usual currency volatility this still seems on track.

The bigger picture – a falling $US

First, to the US dollar. A major part of the Australian dollar’s strength over the last decade has been the downtrend in the US dollar. After a pause this appears to be resuming.

Source: Bloomberg, AMP Capital Investors

Further $US weakness is likely. The US Federal Reserve is signalling no urgency to raise interest rates at a time when other central banks are either lifting interest rates or contemplating lifting them. In addition, rising global investor confidence is reducing demand for the US dollar as a “safe haven”. The converse of US dollar weakness is renewed strength in a range of other currencies:

  • The euro is looking stronger on the back of European Central Bank (ECB) talk of a rate hike, and confidence European authorities are confining sovereign debt problems to Greece, Ireland and Portugal.
  • Asian currencies have risen to the top of their recent range against the $US. With the Renminbi steadily appreciating against the $US and interest rates still rising across Asia, it’s likely Asian currencies – including the Korean won, Taiwan dollar and Singapore dollar – have more upside.
  • The Yen strengthened after the Japanese earthquake. This has since been short circuited by G7 intervention, confusing the outlook for this currency.
  • A weaker $US is also likely to coincide with a stronger $A.

Strong commodity prices

Despite a brief dip as a result of the Japanese nuclear crisis, commodity prices have shown renewed strength. This reflects strong growth in Europe, expectations of rebuilding demand for raw materials from Japan, turmoil in the Middle East and North Africa boosting energy prices and expectations Japan’s nuclear crisis will add to demand for oil, gas and coal. With the industrialisation process in China and other emerging countries likely having much further to go and supply likely to continue to struggle to keep up, the uptrend in commodity prices likely has years to run. And, of course, a weak $US is also positive for commodity prices as the latter are priced in US dollars.

Source: Thompson Financial, AMP Capital Investors

Australian commodity exports such as iron ore, coal and liquid natural gas are all key beneficiaries of this. Commodities make up 70% or so of Australian exports and so the strength in commodity prices has seen the ratio of Australia’s export prices to import prices, or the terms of trade, rise to its highest level since the early 1950s and it is continuing to surprise on the upside. As can be seen in the next chart the $A has tended to lag the strength in the terms of trade. The last time the terms of trade was this high, in the early 1950s, the equivalent of one Australian dollar bought $US1.12.

Australia's strong terms of trade supports the $A above parity

Relatively high interest rates

Australian interest rates at 4.75% are well above those in the US, Europe and Japan where the range is zero to 1%. While the ECB is likely to raise rates next month to 1.25%, there is unlikely to be much follow through and the Bank of Japan has been undertaking more (quantitative) easing. Meanwhile the Fed is likely to be on hold for some time. By contrast, Australian rates are on hold but the Reserve Bank’s bias remains towards more tightening which we expect to occur during the second half as Australian economic growth rebounds on mining investment, Queensland production returns to pre flood levels, flood related rebuilding kicks in and as national income remains strong on the back of high commodity prices. By year end the interest rate differential in Australia’s favour is likely to have increased to around 5% against the US and Japan and 4% versus Europe. This has the effect of attracting funds to Australia, which in turn pushes up the $A.

A longer term perspective on the $A

The general consensus seems to be the Australian dollar is way overvalued and that parity and above is unsustainable. By contrast we think parity and above is sustainable. There are several reasons for this.

First, most fair value models for the Australian dollar have been estimated over a relatively narrow period of history, ie the period since the $A floated in 1983. However, this misses the longer term perspective and the changed fundamentals now facing Australia.
Second, most of the factors that drove the long term slide below parity for the $A have now reversed. Back in 1901 the equivalent of one Australian dollar bought $US2.40 and for most of the last century the $A was above parity against the $US. The long term slide in the $A from $US2.40 in 1901 to a low of $US0.48 in 2001 reflected a combination of soft commodity prices and a perception of Australia as a mediocre, poorly managed, inflation prone “old” economy.

Source: Thomson Financial, AMP Capital Investors

However, these drivers have now all turned around. Commodity prices are in a long term upswing and Australia is seen as well managed with low public debt, inflation under control and relatively high interest rates.

Third, the global financial crisis has exposed a fundamental imbalance in the global economy, which is a high level of consumption and/or public debt in major advanced countries in contrast to low consumption and low debt in emerging countries. A part of the adjustment to rebalance the world is that currencies in the US, Japan and Europe need to fall relative to those in the emerging world, and also against currencies that benefit from emerging world growth such as the Canadian and Australian dollars.

In short, it is likely the sub-parity period from the 1980s was an aberration for the $A, and the improvement in Australia’s relative fundamentals suggest it is likely the $A is going to settle above parity against the $US. Forecasting currency levels is an impossible task but I expect an average around $US1.10 is likely in the years ahead, unless the global economy collapses again. This would be consistent with the high terms of trade.

The impact of a rising $A on the economy and shares

The strong Australian dollar is great news for Australian consumers as it will result in lower prices for imported items, notably things like cars, clothing, petrol and many electrical goods. This in turn is likely to take pressure off inflation and reduce the extent to which the RBA will ultimately have to raise interest rates.

For the broader economy and shares, a strong $A is often seen as bad news as export and import competing companies become less competitive. With around 30% of listed company earnings sourced overseas, a 10% rise in the $A will cut earnings by about 3%. This would suggest a rising $A is bad for the Australian share market.

However, the actual relationship between the $A and the Australian share market is ambiguous. In fact, over the last decade a strong $A has gone hand in hand with economic strength and a weak $A has correlated with economic weakness. The reason is because while a rise in the $A is a dampener for company profits on its own, it’s normally associated with strong economic growth which is good for profits. Given the latest bout of $A strength has been associated with renewed vigour in commodity prices and improved optimism regarding the global outlook, it’s unlikely to cause major problems for the share market or the economy at an aggregate level. This is because the direct negative impact on profit growth from the surge in the $A should be largely offset by the positive impact from solid economic conditions. However, the strong $A could remain a drag on the relative performance of Australian shares against global shares.

From a longer term perspective though, the rise in the $A will present challenges. It’s helping to shift economic resources to the strongly growing resources sector of the economy, which is appropriate from a technical economic perspective but such restructuring will invariably have significant social and regional consequences.

The strong $A and investors

For investors, a rising $A reduces the value of offshore investments, unless they are hedged back to Australian dollars. Global bond and property funds are usually hedged to remove the currency impact. Fully hedged international equity funds are available. With the $A likely to see further gains over time, there is a case to remain biased towards hedged international equity funds as opposed to unhedged funds, although not as strong a case when the $A was well below parity.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

The post $US breaking down, $A breaking higher appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/03/us-breaking-down-a-breaking-higher/feed/ 0 BetaShares U.S. Dollar ETF quadruples in size in a month https://www.adviservoice.com.au/2011/03/betashares-u-s-dollar-etf-quadruples-in-size-in-a-month/ https://www.adviservoice.com.au/2011/03/betashares-u-s-dollar-etf-quadruples-in-size-in-a-month/#respond Tue, 29 Mar 2011 01:08:57 +0000 https://adviservoice.com.au/?p=6794 BetaShares U.S Dollar ETF (ASX Code: USD) AUM reaches $50 million

USD consistently ranking as one of top three most actively traded ETFs

BetaShares passes $120 million in AUM three months after initial product launch

BetaShares Capital Limited (BetaShares) has announced that its US dollar exchange traded fund (ASX Code: USD) has quadrupled in size in the last month reaching $50 million in assets under management. The strong demand for this product has also resulted in BetaShares reaching another milestone, surpassing $120 million in AUM in just three months post the launch of its initial products.

Listed on 1 February 2011, BetaShares U.S. Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the demand for the U.S. Dollar ETF has exceeded expectations and has consistently ranked as one of the top three most traded ETFs on the Australian Securities Exchange.

“We’re continuing to see strong demand from investors looking to back their view on the US$, particularly in light of the historically high levels of the A$ versus the US$ at present” he said.

Stephen Jani, Head of FX Sales at JP Morgan Chase Bank, said investor motives vary: “There are several reasons why investors want exposure to the US$ including participating in a potential US economic recovery, hedging future cross border business obligations and diversifying portfolio exposure. Whatever the reason, investor demand for the US$ is strong as evidenced by the success of the BetaShares product and growth in funds under management,” Mr Jani said.

The strong flows in the U.S Dollar ETF have also resulted in BetaShares reaching over $120 million in AUM since listing its initial products in December 2010.

“BetaShares was set up to address product gaps in the Australian ETF market and based on the strong demand of our ETFs to date, we believe we’re well on the way to achieving that goal,” Mr Corbett said.

“When you look around at ETF markets globally, there is always a strong local player tailoring solutions for the local investor. Reaching this milestone confirms BetaShares as that local provider and we look forward to innovating and delivering further ETF options for Australian investors,” he concluded.

Further information can be found at www.betashares.com.au and the ASX website.

]]> BetaShares U.S Dollar ETF (ASX Code: USD) AUM reaches $50 million

USD consistently ranking as one of top three most actively traded ETFs

BetaShares passes $120 million in AUM three months after initial product launch

BetaShares Capital Limited (BetaShares) has announced that its US dollar exchange traded fund (ASX Code: USD) has quadrupled in size in the last month reaching $50 million in assets under management. The strong demand for this product has also resulted in BetaShares reaching another milestone, surpassing $120 million in AUM in just three months post the launch of its initial products.

Listed on 1 February 2011, BetaShares U.S. Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the demand for the U.S. Dollar ETF has exceeded expectations and has consistently ranked as one of the top three most traded ETFs on the Australian Securities Exchange.

“We’re continuing to see strong demand from investors looking to back their view on the US$, particularly in light of the historically high levels of the A$ versus the US$ at present” he said.

Stephen Jani, Head of FX Sales at JP Morgan Chase Bank, said investor motives vary: “There are several reasons why investors want exposure to the US$ including participating in a potential US economic recovery, hedging future cross border business obligations and diversifying portfolio exposure. Whatever the reason, investor demand for the US$ is strong as evidenced by the success of the BetaShares product and growth in funds under management,” Mr Jani said.

The strong flows in the U.S Dollar ETF have also resulted in BetaShares reaching over $120 million in AUM since listing its initial products in December 2010.

“BetaShares was set up to address product gaps in the Australian ETF market and based on the strong demand of our ETFs to date, we believe we’re well on the way to achieving that goal,” Mr Corbett said.

“When you look around at ETF markets globally, there is always a strong local player tailoring solutions for the local investor. Reaching this milestone confirms BetaShares as that local provider and we look forward to innovating and delivering further ETF options for Australian investors,” he concluded.

Further information can be found at www.betashares.com.au and the ASX website.

The post BetaShares U.S. Dollar ETF quadruples in size in a month appeared first on AdviserVoice.

]]> https://www.adviservoice.com.au/2011/03/betashares-u-s-dollar-etf-quadruples-in-size-in-a-month/feed/ 0 BetaShares US Dollar ETF debuts as top 10 most traded ETF on ASX https://www.adviservoice.com.au/2011/02/betashares-us-dollar-etf-debuts-as-top-10-most-traded-etf-on-asx/ https://www.adviservoice.com.au/2011/02/betashares-us-dollar-etf-debuts-as-top-10-most-traded-etf-on-asx/#respond Sun, 20 Feb 2011 23:45:37 +0000 https://adviservoice.com.au/?p=6021
  • AUM more than doubled in second week of trading
  • Median trade was A$15,000, indicating pent up demand from retail investors for access to U.S dollar exposure in a simple, transparent and low cost way
  • Strong interest from small businesses looking to use the ETF to hedge upcoming U.S. dollar purchases

    • BetaShares Capital Limited (BetaShares) today announced its newly listed US dollar exchange traded fund (ASX: USD) was one of the top 10 most traded ETFs on the Australian Securities Exchange in its first two weeks of trading with assets under management doubling in the second week of trading.

    Listed on 1 February 2011, BetaShares US Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

    Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the average trade size of $15,000 indicates strong retail appetite for foreign exchange investment opportunities that were previously unavailable to them.

    “Exorbitant fees and poor exchange rates in foreign currency bank accounts mean retail investors have been effectively shut out of the foreign exchange markets up until now. Heavy trading by retail investors in the USD ETF suggests a high level of pent up demand for cost effective and simple foreign exchange investment opportunities,” Mr Corbett said.

    “In addition, we are finding that there are a significant number of investors who are investing in this product as a simple way to get exposure to the potential recovery of the U.S. economy”, he continued.

    The launch of the USD ETF comes at a time of historic strength for the Aussie dollar, which is currently trading at about 40% above its long run average value. The ETF enables investors to capitalise on any potential weakening in the A$ relative to the US$. For example, if the US$ appreciates 10% against the A$ (i.e. if the A$ falls in value), the price of the ETF should go up 10% too.

    This exposure comes at a fraction of the cost of current mechanisms available to most investors. Investing A$10,000 in a US dollar bank account can cost an individual up to $700 over a six month period due to fees, costs and poor exchange rates. The superior rates provided by BetaShares mean the same investment in its ETF would cost around A$70.

    BetaShares has also reported strong interest from small to medium business owners which have large US dollar capital expenditures planned in the future and are looking to hedge against a fall in the Australian dollar.

    The US Dollar ETF is the third ETF listed by BetaShares after the Resources Sector ETF (ASX: QRE) and Financial Sector ETF (ASX: QFN) listed on the ASX in mid December. The product launch is further evidence of BetaShares’ commitment to provide Australian investors with ETFs tailored to the Australian market.

    Further information can be found at www.betashares.com.au and www.asx.com.au.

    ]]>
  • AUM more than doubled in second week of trading
  • Median trade was A$15,000, indicating pent up demand from retail investors for access to U.S dollar exposure in a simple, transparent and low cost way
  • Strong interest from small businesses looking to use the ETF to hedge upcoming U.S. dollar purchases

    • BetaShares Capital Limited (BetaShares) today announced its newly listed US dollar exchange traded fund (ASX: USD) was one of the top 10 most traded ETFs on the Australian Securities Exchange in its first two weeks of trading with assets under management doubling in the second week of trading.

    Listed on 1 February 2011, BetaShares US Dollar ETF tracks the performance of the US dollar (US$) relative to the Australian dollar (A$) using a simple, transparent and highly cost-effective structure backed by US dollars held in a bank account with JP Morgan Chase Bank.

    Drew Corbett, Head of Investment Strategy & Distribution at BetaShares said the average trade size of $15,000 indicates strong retail appetite for foreign exchange investment opportunities that were previously unavailable to them.

    “Exorbitant fees and poor exchange rates in foreign currency bank accounts mean retail investors have been effectively shut out of the foreign exchange markets up until now. Heavy trading by retail investors in the USD ETF suggests a high level of pent up demand for cost effective and simple foreign exchange investment opportunities,” Mr Corbett said.

    “In addition, we are finding that there are a significant number of investors who are investing in this product as a simple way to get exposure to the potential recovery of the U.S. economy”, he continued.

    The launch of the USD ETF comes at a time of historic strength for the Aussie dollar, which is currently trading at about 40% above its long run average value. The ETF enables investors to capitalise on any potential weakening in the A$ relative to the US$. For example, if the US$ appreciates 10% against the A$ (i.e. if the A$ falls in value), the price of the ETF should go up 10% too.

    This exposure comes at a fraction of the cost of current mechanisms available to most investors. Investing A$10,000 in a US dollar bank account can cost an individual up to $700 over a six month period due to fees, costs and poor exchange rates. The superior rates provided by BetaShares mean the same investment in its ETF would cost around A$70.

    BetaShares has also reported strong interest from small to medium business owners which have large US dollar capital expenditures planned in the future and are looking to hedge against a fall in the Australian dollar.

    The US Dollar ETF is the third ETF listed by BetaShares after the Resources Sector ETF (ASX: QRE) and Financial Sector ETF (ASX: QFN) listed on the ASX in mid December. The product launch is further evidence of BetaShares’ commitment to provide Australian investors with ETFs tailored to the Australian market.

    Further information can be found at www.betashares.com.au and www.asx.com.au.

    The post BetaShares US Dollar ETF debuts as top 10 most traded ETF on ASX appeared first on AdviserVoice.

    ]]>     https://www.adviservoice.com.au/2011/02/betashares-us-dollar-etf-debuts-as-top-10-most-traded-etf-on-asx/feed/ 0     First currency-based Exchange Traded Fund launched in Australia https://www.adviservoice.com.au/2011/02/first-currency-based-exchange-traded-fund-launched-in-australia/ https://www.adviservoice.com.au/2011/02/first-currency-based-exchange-traded-fund-launched-in-australia/#respond Tue, 01 Feb 2011 03:04:13 +0000 https://adviservoice.com.au/?p=5517 The ASX Group (ASX) announces the launch today of the first exchange traded fund (ETF) over currency to be traded on the Australian Securities Exchange.

    The currency ETF will track the US dollar against the Australian dollar, enabling Australian institutional, intermediary and individual investors to simply and cost-effectively obtain immediate exposure to the US dollar.

    Richard Murphy, ASX General Manager Equity Markets, said the launch of the currency ETF continues the rapid growth of ETFs and Exchange Traded Commodities (ETCs) in the Australian market.

    “The quoting of the currency ETF, issued by BetaShares, expands the suite of ETFs and ETCs available on ASX to 46. Australian ETFs cover domestic and international equities, property, commodities – and now currency – and provide Australian investors with greater opportunity to internationalise their portfolios,” he said.

    “Exchange traded funds have been one of the most successful growth products for both retail and institutional investors around the world over the previous decade. In Australia, ASX is committed to developing the ETF sector to provide investors with access to a broad range of investable asset classes. Last calendar year the market capitalisation of the ETF sector quoted on ASX grew by 45% to $5.1 billion.”

    The providers of the 46 ETFs and ETCs quoted on ASX are: Australian Index Investments (Aii), BetaShares, BlackRock (iShares), ETF Securities, Perth Mint, Russell Investments, State Street (SPDRs) and Vanguard
    Investments.

    Further information on ASX ETFs, ETCs and issuers can be found here www.asx.com.au/etf

    ]]>     The ASX Group (ASX) announces the launch today of the first exchange traded fund (ETF) over currency to be traded on the Australian Securities Exchange.

    The currency ETF will track the US dollar against the Australian dollar, enabling Australian institutional, intermediary and individual investors to simply and cost-effectively obtain immediate exposure to the US dollar.

    Richard Murphy, ASX General Manager Equity Markets, said the launch of the currency ETF continues the rapid growth of ETFs and Exchange Traded Commodities (ETCs) in the Australian market.

    “The quoting of the currency ETF, issued by BetaShares, expands the suite of ETFs and ETCs available on ASX to 46. Australian ETFs cover domestic and international equities, property, commodities – and now currency – and provide Australian investors with greater opportunity to internationalise their portfolios,” he said.

    “Exchange traded funds have been one of the most successful growth products for both retail and institutional investors around the world over the previous decade. In Australia, ASX is committed to developing the ETF sector to provide investors with access to a broad range of investable asset classes. Last calendar year the market capitalisation of the ETF sector quoted on ASX grew by 45% to $5.1 billion.”

    The providers of the 46 ETFs and ETCs quoted on ASX are: Australian Index Investments (Aii), BetaShares, BlackRock (iShares), ETF Securities, Perth Mint, Russell Investments, State Street (SPDRs) and Vanguard
    Investments.

    Further information on ASX ETFs, ETCs and issuers can be found here www.asx.com.au/etf

    The post First currency-based Exchange Traded Fund launched in Australia appeared first on AdviserVoice.

    ]]>     https://www.adviservoice.com.au/2011/02/first-currency-based-exchange-traded-fund-launched-in-australia/feed/ 0     Global Reflation Mark II, gold and the Australian dollar https://www.adviservoice.com.au/2010/09/global-reflation-mark-ii-gold-and-the-australian-dollar/ https://www.adviservoice.com.au/2010/09/global-reflation-mark-ii-gold-and-the-australian-dollar/#respond Thu, 23 Sep 2010 03:31:07 +0000 https://adviservoice.com.au/?p=843

    Key points

    • The sub-par recovery in the US, Japan and Europe and constrained fiscal policy most likely means that we will see another round of global policy reflation, centred on quantitative easing (or printing money).
    • This will be bad news for G3 currencies, but good news for Asian currencies and gold. And it will likely also help stimulate the next asset price bubble.
    • The $A is likely to head higher as Japan and the US boost their money supplies and the RBA continues to raise Australian interest rates.

    Global Reflation Mark II

    Another round of global monetary reflation is likely getting underway with the US Federal Reserve and the Bank of England indicating that they are now considering additional monetary easing and Japan undertaking its own easing in moving to push the value of the Yen lower. This has major implications for foreign exchange markets, the gold price and the next asset price bubble.

    The key driver is the sub-par nature of the recoveries in the US, Japan and Europe and the inability of fiscal policy to respond further given already high public debt levels. With interest rates at or close to zero, central banks look to be turning to another round of quantitative easing. Technically this involves expanding the size of the central bank’s balance sheet and basically involves using printed money to buy securities, so as to increase the quantity of money in the system. Increase the supply of something and its price normally falls!

    • Following its September meeting the US Federal Reserve has indicated that it is considering more monetary easing if needed to support the economic recovery and push inflation back up to levels more consistent with price stability. And since the Fed Funds rate is close to zero this effectively would mean another round of quantitative easing (or QE2), which would involve using printed money to buy Treasury bonds. With US growth now below the level necessary to stop unemployment from rising (which is at least 2.5% pa) and the Fed likely to revise down its 2011 growth forecasts, it’s likely to engage in quantitative easing following its November meeting. Market speculation is that the Fed is considering undertaking another $US1 trillion of asset purchases (which is the equivalent of 7% of US GDP). Coming on the back of $US1.3 trillion in Fed asset purchases in 2008-09 this would result in a further sharp rise in the size of the Fed’s balance sheet (see the chart below) and another big increase in the supply of US dollars.

    Source: US Federal Reserve, AMP Capital Investors

    Market expectations of QE2 in the US and a resultant increase in the supply of US dollars have seen renewed downwards pressure on the $US.

    • The Bank of England has also indicated that it is considering more quantitative easing.
    • Tiring of seeing the Yen move ever higher in response to a weakening $US, Japan has responded by starting to buy US dollars and by leaving the increased supply of Yen in the economy in what is called unsterilized intervention. As such it has essentially engaged in quantitative easing itself. Currently it has only spent Yen2 trillion but purportedly has Yen35 trillion available, which would be about 7% of its GDP and hence roughly match the potential US easing.
    • So far Europe has merely complained about the Bank of Japan’s intervention and it is still reaping the benefits of the weaker euro seen over the December to May period. But with the euro rising sharply again in response to a weaker $US and fiscal tightening likely to impact next year there is a good chance that it will also be forced into quantitative easing next year.

    The end result is likely to be an increase in the supply of US dollars, Yen, British pounds and euros and a race down in each of these currencies, with the $US leading the charge.

    Such “beggar thy neighbour” policies or “competitive depreciations” will no doubt result in worries about all sorts of things, in particular inflation and trade tensions. Inflation is a risk but as with QE1 it isn’t going to happen until people start spending and spare capacity, evident in circa 10% unemployment in the US and Europe and idle factories, is used up. Right now the bigger risk is deflation, so G3 central banks can afford to take risks with printing more money.

    Another obvious issue is: will it work?

    Quantitative easing operates by injecting more cash into banks, lowering mortgage rates and corporate borrowing rates (as government bond yields fall) and pushing the exchange rate lower (at least against countries not doing the same). But so far US banks have not leant much of the cash out from the first round of quantitative easing (ie the money multiplier remains low) and mortgage rates are already at record lows. The counter of course is that QE1 probably did prevent a worse outcome, banks will be able to further rebuild their balance sheets, further falls in mortgage rates will allow more US homeowners to refinance their loans at lower rates and the $US will at least fall against non-major currencies providing a further boost to its exports. And Fed Chairman Ben Bernanke feels that he at least has to try!

    So what will it all mean?

    There are several implications from another round of monetary easing.

    First, it means another boost to global liquidity which should at least support growth, if not provide an additional boost to growth going forward.

    Second, it will likely be positive for share markets and other listed growth assets as it was through last year following QE1.

    Third, it will be bad for G3 currencies – first the $US, but also the Yen and ultimately the euro as its economy lags the US and it is forced to do the same.

    Fourth, Asian and other emerging market currencies are likely to remain key beneficiaries as their central banks engage in tightening and the relative supply of their currencies falls relative to US dollars, Yen, British pounds and euros. China’s move last week to allow a faster appreciation in the Renminbi will likely help accelerate the rise in Asian currencies.

    Source: Bloomberg, AMP Capital Investors

    Fifth, the increase in the supply of US dollars, Yen, British pounds and euros (the latter next year) will be good for gold as investors seek a safe haven from falls in major paper currencies. This explains why gold has recently broken out to a new record high, even though inflation remains benign. The chart below shows that while the gold price has come a long way over the last decade it is still well below its inflation adjusted peak of 1980, when gold rose above $US2,000 an ounce. It will likely head up to a similar level over the next few years.

    Source: Global Financial Data, AMP Capital Investors

    Sixth, commodity currencies such as the Australian and Canadian dollars are also likely to be key beneficiaries. Talk of an additional boost to the supply of US dollars via quantitative easing is coming at a time when the RBA is signalling more interest rate hikes and commodity prices are strong all of which are positive for the $A. All the talk of QE2 in the US is helping propel the $A back to parity against the $US. The chart below showing the value of the $A since 1901 serves as a reminder that the post float period of the $A which saw it slip below parity is an aberration. The norm up until early 1982, was for the $A to trade above parity. This includes the early 1950s when the terms of trade was about as strong as it is now. Back then one Australian dollar bought $US1.12.

    Source: Thomson Financial, RBA, AMP Capital Investors

    Finally, another surge in global liquidity will help fertilise the next asset price bubble, the seeds of which have already been sown in the bursting of the last. This could well be in emerging markets or commodities. And to the extent that emerging market countries intervene to resist appreciation in their currencies it will only add to the boost in global liquidity.

    Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.
    ]]>

    Key points

    • The sub-par recovery in the US, Japan and Europe and constrained fiscal policy most likely means that we will see another round of global policy reflation, centred on quantitative easing (or printing money).
    • This will be bad news for G3 currencies, but good news for Asian currencies and gold. And it will likely also help stimulate the next asset price bubble.
    • The $A is likely to head higher as Japan and the US boost their money supplies and the RBA continues to raise Australian interest rates.

    Global Reflation Mark II

    Another round of global monetary reflation is likely getting underway with the US Federal Reserve and the Bank of England indicating that they are now considering additional monetary easing and Japan undertaking its own easing in moving to push the value of the Yen lower. This has major implications for foreign exchange markets, the gold price and the next asset price bubble.

    The key driver is the sub-par nature of the recoveries in the US, Japan and Europe and the inability of fiscal policy to respond further given already high public debt levels. With interest rates at or close to zero, central banks look to be turning to another round of quantitative easing. Technically this involves expanding the size of the central bank’s balance sheet and basically involves using printed money to buy securities, so as to increase the quantity of money in the system. Increase the supply of something and its price normally falls!

    • Following its September meeting the US Federal Reserve has indicated that it is considering more monetary easing if needed to support the economic recovery and push inflation back up to levels more consistent with price stability. And since the Fed Funds rate is close to zero this effectively would mean another round of quantitative easing (or QE2), which would involve using printed money to buy Treasury bonds. With US growth now below the level necessary to stop unemployment from rising (which is at least 2.5% pa) and the Fed likely to revise down its 2011 growth forecasts, it’s likely to engage in quantitative easing following its November meeting. Market speculation is that the Fed is considering undertaking another $US1 trillion of asset purchases (which is the equivalent of 7% of US GDP). Coming on the back of $US1.3 trillion in Fed asset purchases in 2008-09 this would result in a further sharp rise in the size of the Fed’s balance sheet (see the chart below) and another big increase in the supply of US dollars.

    Source: US Federal Reserve, AMP Capital Investors

    Market expectations of QE2 in the US and a resultant increase in the supply of US dollars have seen renewed downwards pressure on the $US.

    • The Bank of England has also indicated that it is considering more quantitative easing.
    • Tiring of seeing the Yen move ever higher in response to a weakening $US, Japan has responded by starting to buy US dollars and by leaving the increased supply of Yen in the economy in what is called unsterilized intervention. As such it has essentially engaged in quantitative easing itself. Currently it has only spent Yen2 trillion but purportedly has Yen35 trillion available, which would be about 7% of its GDP and hence roughly match the potential US easing.
    • So far Europe has merely complained about the Bank of Japan’s intervention and it is still reaping the benefits of the weaker euro seen over the December to May period. But with the euro rising sharply again in response to a weaker $US and fiscal tightening likely to impact next year there is a good chance that it will also be forced into quantitative easing next year.

    The end result is likely to be an increase in the supply of US dollars, Yen, British pounds and euros and a race down in each of these currencies, with the $US leading the charge.

    Such “beggar thy neighbour” policies or “competitive depreciations” will no doubt result in worries about all sorts of things, in particular inflation and trade tensions. Inflation is a risk but as with QE1 it isn’t going to happen until people start spending and spare capacity, evident in circa 10% unemployment in the US and Europe and idle factories, is used up. Right now the bigger risk is deflation, so G3 central banks can afford to take risks with printing more money.

    Another obvious issue is: will it work?

    Quantitative easing operates by injecting more cash into banks, lowering mortgage rates and corporate borrowing rates (as government bond yields fall) and pushing the exchange rate lower (at least against countries not doing the same). But so far US banks have not leant much of the cash out from the first round of quantitative easing (ie the money multiplier remains low) and mortgage rates are already at record lows. The counter of course is that QE1 probably did prevent a worse outcome, banks will be able to further rebuild their balance sheets, further falls in mortgage rates will allow more US homeowners to refinance their loans at lower rates and the $US will at least fall against non-major currencies providing a further boost to its exports. And Fed Chairman Ben Bernanke feels that he at least has to try!

    So what will it all mean?

    There are several implications from another round of monetary easing.

    First, it means another boost to global liquidity which should at least support growth, if not provide an additional boost to growth going forward.

    Second, it will likely be positive for share markets and other listed growth assets as it was through last year following QE1.

    Third, it will be bad for G3 currencies – first the $US, but also the Yen and ultimately the euro as its economy lags the US and it is forced to do the same.

    Fourth, Asian and other emerging market currencies are likely to remain key beneficiaries as their central banks engage in tightening and the relative supply of their currencies falls relative to US dollars, Yen, British pounds and euros. China’s move last week to allow a faster appreciation in the Renminbi will likely help accelerate the rise in Asian currencies.

    Source: Bloomberg, AMP Capital Investors

    Fifth, the increase in the supply of US dollars, Yen, British pounds and euros (the latter next year) will be good for gold as investors seek a safe haven from falls in major paper currencies. This explains why gold has recently broken out to a new record high, even though inflation remains benign. The chart below shows that while the gold price has come a long way over the last decade it is still well below its inflation adjusted peak of 1980, when gold rose above $US2,000 an ounce. It will likely head up to a similar level over the next few years.

    Source: Global Financial Data, AMP Capital Investors

    Sixth, commodity currencies such as the Australian and Canadian dollars are also likely to be key beneficiaries. Talk of an additional boost to the supply of US dollars via quantitative easing is coming at a time when the RBA is signalling more interest rate hikes and commodity prices are strong all of which are positive for the $A. All the talk of QE2 in the US is helping propel the $A back to parity against the $US. The chart below showing the value of the $A since 1901 serves as a reminder that the post float period of the $A which saw it slip below parity is an aberration. The norm up until early 1982, was for the $A to trade above parity. This includes the early 1950s when the terms of trade was about as strong as it is now. Back then one Australian dollar bought $US1.12.

    Source: Thomson Financial, RBA, AMP Capital Investors

    Finally, another surge in global liquidity will help fertilise the next asset price bubble, the seeds of which have already been sown in the bursting of the last. This could well be in emerging markets or commodities. And to the extent that emerging market countries intervene to resist appreciation in their currencies it will only add to the boost in global liquidity.

    Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591) (AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

    The post Global Reflation Mark II, gold and the Australian dollar appeared first on AdviserVoice.

    ]]>     https://www.adviservoice.com.au/2010/09/global-reflation-mark-ii-gold-and-the-australian-dollar/feed/ 0