The strong Australian dollar is a disaster for Australian manufacturing, and persistent credit restrictions are likely to depress engineering and construction for years.

These are the two big, possibly permanent, losers from the aftermath of the ‘Great Recession’, but watching the action in Canberra there’s a sense of Nero Claudius fiddling on his lyre during the Great Fire of Rome.

Not that Australia is burning – far from it – but profound structural shifts are taking place in this country while our political leaders squabble endlessly and pointlessly about asylum seekers and emissions trading.

This country has indeed come through the ‘Great Recession’ in good shape and our resource industries are looking forward to decades of boom on the back of China and India, but that picture masks some difficult and lasting problems. Every silver lining, it seems, has a cloud; complacency is unwarranted.

In particular the 50 per cent appreciation in the currency from its long-term trading range could drive a manufacturing catastrophe.

Unions and industry groups are calling for government assistance after last week’s closure of local tyre manufacturing by Bridgestone Australia, but the task is too great for that. A thousand flowers will die if the currency continues to rise, or even stays where it is.

In addition to that, we are now seeing a classic post-bubble deleveraging cycle manifest in the structural tightening of credit around the world. Global bank lending is continuing to contract although there are signs in Australia that business lending is beginning to resume.

But it will not return to the way it was. Much of the securitised lending market has vanished, never to return, and bank capital has permanently increased.

Last week, Leighton CEO and president of the Australian Constructors Association, Wal King, said that despite the government’s education building plans, firms in Australia would remain under pressure for at least two years because of “tight funding for development and the fall-out from the contraction in global industrial production”.

He and the AIG’s Heather Ridout were releasing a joint construction outlook survey on the same day that Treasury Secretary Ken Henry spoke about the structural changes that will be forced on the Australian economy by a sustained terms-of-trade boom.

The survey predicted a drop of $9 billion in engineering and construction work this financial year. The chief economist of the Master Builders Association, Peter Jones, predicted a 7 per cent fall in employment over the next couple of years.

Last week two senior bureaucrats gave important speeches about the consequences of high terms-of-trade – Ken Henry, and the RBA’s Assistant Governor (Economic), Philip Lowe. The terms-of-trade, by the way, is the ratio of export prices to import prices – that is, export prices divided by import prices.

Lowe pointed out that despite big falls in commodity prices from their peaks last year, Australia’s terms-of-trade are around 50 per cent higher than the levels prevailing in the 1980s and 1990s.

The only other time they have been as high as they are now was when the wool price spiked in the 1950s.

The result of this is that Australia has become, and will probably remain, a very high investment economy: the big contradiction to the story about Australia’s lack of investment in infrastructure that was highlighted yesterday by the Rod Sims of Port Jackson Partners, is mining, which is now 5 per cent of GDP – a record by a big margin. Also, huge LNG projects are now planned for export to China, on top of iron ore and coal expansion to take advantage of China’s steadily growing steel consumption.

Philip Lowe says the mining booms of the 1960s and 1980s look “relatively small” compared to this one.

Ken Henry said: “Standard economic theory tells us that if the terms-of-trade remain at high levels, not only will the resources sector command more capital and labour, manufacturing and other industries whose relative output prices are declining will command less, even as our total stock of capital expands.

“Furthermore, as the factors of production are reallocated, the pattern of growth will be characteristic of what is often referred to as a ‘two speed economy’; and real wages growth and labour productivity growth will be weak – possibly even negative.”

Many countries are taking action, usually pointlessly, to prevent this reallocation by halting the rise of their currencies against the US. Brazil, for example, slapped a tax on capital inflows; Korea, Thailand, Russia, Indonesia and Taiwan have been buying dollars.

A good start in Australia would be some recognition of what’s going on.

The Australian dollar rose to a fresh yearly high of 0.9326 against the greenback and the higher-yielding currency may continue to appreciate going into the following month as investors speculate the Reserve Bank of Australia to tighten policy throughout the second-half of the year. Credit Suisse overnight index swaps shows market participants are pricing a 131% chance for a 25bp rate hike in November and expect the central bank to raise borrowing costs by more than 200bp over the next 12-months, and the Aussie may continue to retrace the sell-off from the previous year as policy makers hold and improved outlook for the economy.

The Reserve Bank of Australia Minutes said that the “very expansionary setting of policy was no longer necessary” as the $1T economy skirts the global recession, and went onto say that it may be “imprudent” for the central bank to hold the interest rate at the 49-year low as policy makers maintain their dual mandate to ensure price stability while fostering full-employment. Moreover, the central bank held a hawkish tone and said keeping borrowing costs at “very low levels” could raise the risks for inflation, and said that the “trough in inflation was significantly higher than earlier thought.” Moreover, RBA Assistant Governor Philip Lowe stated that the rebound in economic activity would “gradually lead to a normalization of interest rates,” and said that the country is likely to have “a higher average exchange rate than we’ve had over the past couple of decades.” However, the central bank expects the marked appreciation in the Australian dollar to temper the risks for inflation, and the central bank may adopt a wait-and-see approach over the remainder of the year as the outlook for global growth remains uncertain.

Nevertheless, the economic docket for the following week is likely to spark increased volatility for the Australian dollar and may drag on the exchange rate as market participants anticipate price pressures to weaken further in the second-half of the year. Economists forecast consumer prices to grow at an annual pace of 1.2% in the third quarter after rising 1.5% during the three-months through June, while producer prices are project to fall to an annualized rate of 0.5% from 2.1% in the second-quarter. At the same time, private-sector credit is anticipated to increase 0.2% in September following the 0.1% rise in the previous month, while bank lending is expected to grow at an annualized pace of 2.0% from the previous year. As a result, the slew of mixed data may leave the AUD/USD confined in a narrow range as investors weigh the outlook for future policy but nevertheless, as risk trends continue to dictate price action in the currency market, a rise in risk appetite may lead the high-yielding currency to hold above 0.9300 over the following week.

The Japanese currency lost ground across the board in early Asian trading on Monday.

The yen drifted lower to 129.57 against the euro, 92.69 versus the US dollar, 150.23 against the pound and 85.57 against the Swiss franc by 8:00 pm ET and this may be compared to Friday’s closing values of 128.99, 92.48, 149.97 and 85.28, respectively.

The Japanese unit also slipped to 58.34 against the New Zealand dollar, 79.94 versus the Canadian dollar and 72.46 versus the Australian dollar by 8:05 pm. The yen closed last week’s deals at 58.03 against the kiwi, 79.49 versus the loonie and 72.03 against the aussie.

Australian Dollar Falls To 13-day Low Against US Currency

The Australian dollar edged down against the US currency during early deals on Monday. At 3:10 am ET, the aussie-dollar pair declined to a 13-day low of 0.7899, compared to 0.7977 hit late New York Friday. If the pair falls further, 0.785 is seen as the next target level

For those who plan to visit some relatives in UK during the next few weeks, this may interest you. The following chart represents the evolution of the parity of the Australian Dollar against the British Pound (AUD/GBP). After a long-term bearish trend between 1999 and late 2001 (inflection point, point A on the weekly chart), the currency pair started to rise back and has been riding a long-term bullish trend until now.

 

It sounds like more of the same from the past few weeks: sharemarkets rattled, financial stocks rattled and commodities on the slide. 

Well, it was up till Friday when it suddenly became a very different story.

And this morning, a switchback, with oil under the $US100 a barrel mark in New York trading early today as damage from Hurricane Ike wasn’t as bad as feared.

The US dollar fell Friday as the slide in the euro came to an end; the Australian dollar bounced a couple of cents; gold, copper and several other commodities rose and Hurricane Ike was the big influence.

But the big question was whether Friday’s bounce was due to Ike coming ashore and apparently not leaving too much damage to the oil and gas producing, refining and distribution facilities along the Texas coast between Houston and Galveston.

At least 13 refineries in Texas were shut for the passage of Ike.

That was 3.64 million barrels a day of refining capacity.

But as we have seen after storms in the past month, once the situation is clarified, then the prices of oil, petrol and gas will ease quite quickly.

And that’s what seems to have happened after Ike as oil fell in early electronic trading in new York to $US99.25 after dropping to $US98.75 a barrel early this morning, our time.

The October New York contract briefly dipped to $US99.99 on Friday, falling under the $US100 level for the first time since April 1.

But Nymex crude in New York rose 31c to close at $US101.18 a barrel.

In London, October Brent North Sea crude eased 6c to settle at $US97.58 a barrel.

Oil prices are down $US47.29 a barrel since the peak of $US147.47 on July 11.

For all the sound and fury of Ike, the real story remains the continuing dip in American consumption of oil-based energy products.

US energy consumption is down 3.8% over the past four weeks compared with the same period in 2007, while petrol consumption is down 2.1%.

 

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On the Chicago grain markets, the emphasis is shifting as the harvest gets underway and the yields of wheat, corn, soybean and other crops becomes clearer.

The United States Department of Agriculture said on Friday that the hugely important corn harvest won’t be as big as thought because of widespread dry, warm weather last month.

The USDA said farmers will harvest 1.8% less corn than forecast last month, while the soybean harvest will be down 1.3%, but wheat output will be higher in both the US and globally.

The USDA forecasts steeper increases in corn and soybean prices, which have eased from the record levels set earlier in the year.

December corn rose 30 USc, or 5.6% on Friday to $US5.6325 a bushel in Chicago. That pushed prices up 2.7% this week. That left the price of the most active contract down 30% from the all time high of $US7.9925 in late June.

November soybean futures rose 26c, or 2.2%, to $US12.02 a bushel in Chicago. The price rose 2.1% last week. Beans are down 27% from the all time high of $US16.3675 hit in early July

The USDA said the average cash corn prices in the crop year that began September1 were $US5.50 a bushel, compared with $US5.40 estimated in August and $US4.20 in the most recent year.

The Department said cash soybean prices will average $US12.35 a bushel this crop year (which started on September 1), up from last month’s estimate of $US2.25 and up from $US10.15 in the previous year.

 

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Wheat was the odd one out with prices falling for a third straight week after the USDA made no change in its estimate of US domestic stocks in the coming year, suggesting that there might be more grain than the market thought.

The USDA said it expects US carryover stocks on May 31 (the end of the wheat crop year) will be around 574 million bushels, while exports will total 1 billion bushels, matching the forecasts made in August by the USDA.

December wheat futures fell 7c to $US7.1925 a bushel on Friday, down 4.3% over the week and 19% this year.

The USDA also increased its estimate of global production to a record 676.3 million tonnes, up from last month’s forecast of 670.8 million tonnes.

Canadian farmers will harvest 25.4 million tonnes, up slightly from the August forecast of 25 million tonnes; European Union output will be 147.2 million tonnes, up from 143.2 million tonnes in the August forecast and these will offset declines in Australia and Argentina: Australia will produce 22 million tonnes, down from the 25 million tonnes in the August forecast and Argentina growers may harvest 12.5 million tonnes, 1 million tonnes down on the August estimate.

According to the USDA’s forecast, the US is expected to be the largest exporter of wheat, followed by Canada, Russia, Australia, Ukraine and Argentina.

 

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Copper had its best week in three, rising sharply on Friday as the US dollar lost ground against the euro.

Comex December copper futures added 7.15 USc, or 2.3%, to $US3.194 a pound. The price was up 3.1% last week

The metal climbed from Wednesday-Friday, as signs of declining mine output increased concerns that supplies may be tight next year. Some analysts, especially at Citigroup, are forecasting demand to run ahead of production next year.

Copper was also supported Friday by a fall in Chinese stocks.

Stocks overseen by the Shanghai Futures Exchange dropped 29% to 13,554 tonnes, the lowest level since 2003.

On the London Metal Exchange, three month copper rose $US192, or 2.8%, to $US7,122 a tonne, or $US3.23 a pound.

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Gold jumped Friday, ending a nine-day losing streak, thanks to the US dollar’s fall against the euro.

The euro rose as much as 1.5% against greenback, but ended off 0.3% for the week.

The Australian dollar finished at $US82.36 in New York, up from $US80.48 in Sydney on Friday afternoon and $US81.64 in Sydney the week before.

It was a rare gain for the currency, the first for a month or more over the week and the strongest daily performance for weeks.

Gold fell 4.8% over the week, despite a $US19 dollar an ounce rise on the day.

Comex December gold rose $US19, or 2.5% to $US764.50 an ounce in New York. The metal had fallen 11% from the end of August to last Thursday

Silver also had a rare rise, finishing up 24c, or 2.3%, to $US10.795 an ounce for the December contract. The metal still dropped 12% last week and is down 28% this year.

Gold is down 26% from the record $US1,033.90 reached in March and is off 8.8% in 2008.

 

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The downturn in commodities since the middle of July has been pretty vicious and this week it seemed to be made more tense by the way the market fell across the board as Hurricane Gustav squibbed it and didn’t prove to be the major destroying storm that many had feared. The way, oil, gold, copper and other metals, plus major grain prices fell after the passing of Gustav indicates that the old fear about supply shortages no longer dominates thinking in these commodity markets. Most commodities were weaker to  steady overnight Wednesday, but it was more of a holding pattern than any sort of recovery. For Australia, as we start enjoying the fruits of the boom, it’s a timely reminder that more needs to be done here to make the economy more efficient and more productive. We are at present relying on higher receipts for our coal and iron ore exports and not much more as prices for other resources have titled downwards since the slump started. If anything should slow China’s economy in the next year or so to a much lower level of growth, then we will be exposed to a much sharper slump in activity than we saw with yesterday’s GDP numbers. The Reuters-Jefferies CRB index, a global benchmark for commodities prices, has fallen 18.9% since June 30, to a six-and-a-half-month low, after surging in the first half by almost 30%. July was in fact the worst month for many commodity indexes for 30 years or so because mainly of the steep drop in oil prices. Prices are still higher than they were a year ago, but as we move through the rest of 2008 and into 2009 that premium will either simply disappear with each month’s comparison, or will show up in more price falls to the point where the comparison is negative. We have to assume that just as commodities probably overshot and went to high from March through mid-July that prices will overshoot on the way down and fall to unsustainably low levels.  But some analysts warn that because their financial investors involved there could be a much steeper fall than expected simply because of the impact of momentum. Oil is trading closer to $US100 a barrel than it has for more than five months, gold eyed and eased under $US800 an ounce, copper, is glancing towards the $US3 a pound level and wheat, soybeans and corn futures prices are busy retracing former price rises. Gold was trading at $US799.90/800.90 an ounce in Asia late yesterday, down from $US804.90/806.25 an ounce late in New York Tuesday, when it fell as low as $US790.40 after oil dropped and the dollar rallied. It traded just above $US800 an ounce in New Yortk overnight.Gold struck a nine-month low around $US773 in mid-August. Oil traded around $US109 a barrel in New York. This sharp sell off in commodities, led by oil seems to have had its first notable victim among investors with a multi-billion dollar hedge fund imploding and now facing being broken up. Bloomberg has reported that this slump had ensnared Ospraie Management of the US which is going to close its biggest after it fell almost 27% in August and 38.6% from the start of 2008. It’s 20% owned by the struggling Lehman Bros investment bank. Bloomberg said the Fund had a value of $US2.8 billion at the start of last month, so the loss would have been in the order of $US750 million in the month. Bloomberg said a letter from founder, Dwight Anderson, to investors explained that the Ospraie Fund lost 26.7% in August, after a “substantial sell-off in a number of our energy, mining and resource equity holdings.” “I am extremely disappointed with this result and the fund’s sudden reversal in performance. After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.” The Ospraie Fund was started in 1999.

 

Bloomberg said that the closure of the Ospraie Fund leaves the New York-based firm overseeing three remaining funds with more than $US4 billion in assets, down from $9 billion in March.

Commodity market indexes fell by around 10% in August, and are off 20% since the slump started in Mid-July as investors switched out of mining and resource investments and into mainly US shares because of expectations the US wouldn’t slump as much as Europe, Asia the UK or Japan would.

It sold out of Iluka in recent days, according to a statement to the ASX from the beach sands miner and processor yesterday evening

Oil closed at around $US115.46 a barrel in New York on Friday before the holiday long weekend. At one stage overnight the price was down around $US105 a barrel.

Copper plunged as well, losing nearly 11 US cents a pound in New York to close at $US3.29 a pound (a seven month low) while gold fell by around $US24 to $US810 an ounce.

The Australian dollar weakened, falling to a day’s low of 82.70 US cents, that’s also the lowest for around a year. It then recovered back over 83 US cents.

While that followed the Reserve Bank’s 0.25% rate cut yesterday, it wasn’t the major reason. The rate cut had been widely expected and was in the price of the currency: it was the sharp drop in oil, copper and other commodities that hit resource-based currencies including the Aussie overnight.

The futures prices for wheat, corn and soybeans all fell sharply as well as Gustav faded.

It was a significant slump across the board for commodity prices. Metals in London, led by lead also fell sharply.

Markets were tossed around as investors wondered about whether this rapid correction would finish.

Not helping was a gloomy assessment of the current state of the world’s major economies that helped ended the whoopee over oil prices.

The Organisation for Economic Cooperation and Development warned that overall, “the picture for the major economies is of a particularly weak second half”.

It saw a growth uptick for the US, but the eurozone and UK economies will “barely creep forward” in the second half of this year.

The OECD suggested that global financial turmoil might be entering a “new phase” with the stream of bad news reported by banks now reflecting generally economic weakness rather than direct effects of the credit squeeze.

The OECD revised up significantly its forecast for US growth this year, after significantly stronger-than-expected second quarter data. It expected 1.8% growth, compared with its previous forecast of 1.2%.

But surveys out yesterday showed a sharper than expected fall in US construction spending and a contraction in manufacturing, led by a drop in forward orders, employment and inventories. Exports were up and inflation eased.

The OECD gave itself an out by warning that there was a lot of uncertainty about how quickly the effects of the US fiscal stimulus package would fade.

The OECD was worried about inflation in Europe and overnight those concerns were given some additional impetus with news that producer prices in the 15 country eurozone rose 1.1% in July, compared with 1% in June. That made for an annual rate of 9% (not much different to the US) in the year to July.

European retail sales fell 2.1% in July compared with July 2007, after a record 3.1% drop in June.

That won’t be enough to get the ECB to cut rates tonight, while the Bank of England’s next move is unclear, despite the overwhelming weight of gloomy news about the British economy. Its decision will come tonight, our time

A desperate Labour Government has attempted to boost the sinking housing sector by significantly expanding the stamp duty exemption on house purchases of homes worth up to 175,000 pounds from 125,000 pounds. It will cost near $A2 billion in a budget already heavily in deficit.

Money will also go to helping people avoid repossession (nearly $A400 million). But the British pound continued its worst fall in 16 years.

 

 

 

The most important part of investing is to clearly understand what you’re investing in. In the currency world, most currency traders will talk about the “seven” majors.

The seven majors are the currencies that are traded most often on major brokerage desks around the world. The seven majors are generally paired with the dollar, so technically, the U.S. dollar would count as the eighth “major.”
Here’s a quick 30 second introduction to each of the major currencies…

U.S. Dollar (USD): The majority of trades in the Forex market involve the U.S. dollar against a different currency because it is currently used as the world’s reserve currency.

Euro (EUR): This is the new kid of the currency majors. Lately, the euro has been stepping up to take its place as a reference currency, as well as a larger component of foreign reserves by banks. It is also known as the anti-dollar because the euro tends to appreciate as the dollar depreciates.

Japanese Yen (JPY): The yen has been known as the carry-trade currency because for years, investors have borrowed yen to fund their carry-trades. Because Japan imports all of its oil, when crude oil prices begin to climb this hurts its economy and greatly impacts the value of the yen.

Swiss Franc (CHF): Also known as Swissie, it is sometimes called a ‘safe heaven,’ due to Switzerland’s independent stance, economy isolation, and strong private banking system. This in turn has made their currency very neutral.

The British pound (GBP): Frequently called, Cable or Sterling, the pound first got these nicknames because it was the first currency the Forex market traded through ‘cables’ across the Atlantic. The pound is the fourth most traded currency on the market and Great Britain’s economy is one of the strongest in Europe.

Canadian dollar (CAD): This currency’s unusual nickname, the Loonie, comes from the coins appearance which features a loon, a common Canadian bird, on the coins backside. Canada is a resource-focused economy, so the price of oil drives this currency along with commodities.

Australian dollar (AUD): Known as the Aussie, this currency is popular in the Forex market because of Australia’s currently high interest rates and generally stable economy. The Australian dollar is greatly influenced and driven by gold prices.

New Zealand dollar (NZD): Also known as the “kiwi,” the New Zealand dollar traditionally tracks the Aussie dollar’s path because these economies are tied together through exports. However, sometimes the New Zealand can fall while the Aussie dollar rises as we have recently witnessed.