It’s not been widely reported yet, perhaps because too few people recognise the importance of currency changes. But while the gold price was falling, the Australian dollar was rising – and rising quite rapidly for a market where glaciers have been known to move faster.
The net effect on Australian gold producers was that the roughly 6% fall in the gold price, from $US1385 an ounce in mid-March to $1294/oz at the London afternoon fix on Friday, translates to a 10% fall on conversion to Australian dollars, because the Aussie currency has risen by roughly 4% against its US cousin over the same time.
From about 89c as the gold price sat at $1385/oz, the Australian dollar has risen to 92.7c in what ranks as one of the biggest market “surprises” for several years.
The reason the currency move can be described as a surprise is that some of the allegedly smartest investment bankers in the world have been telling clients to short-sell the Aussie because they believed it had further to fall after its drop from $1.05 at this time last year.
One of the favourite forecasts for the Aussie dollar is a staggered decline to about 85c, and then perhaps as low as 75c, a rate last seen about 2006. There are even some forecasts floating around of a 65c exchange rate.
At this point the eyes of some readers will start to glaze over because they don’t understand why Dryblower reckons the currency market is so important. If you are one of them, then it may be time to wake up or risk becoming one of the big losers in the next market cycle.
What appears to be happening is that a combination of good and bad-news events is producing the right climate for the Australian dollar to resume its “parity” status with the US dollar … and perhaps rise well beyond parity.
No prize for guessing that this is not good news for gold producers, or most exporters who have been enjoying the 15% boost to their incomes after conversion from US dollar-denominated sales since the Aussie dollar fell from $1.10 at the height of the construction phase of the resources boom.
Currency markets are, however, not to be ignored or defied because to stand in the way of a currency shift produces the same result as standing in the way of a steamroller.
The driver behind last week’s rise in the Australian dollar was a combination of speculation that the country’s central bank would be forced to raise interest rates later in the year to prick a property-price bubble, a realisation that Australia’s terms of trade are morphing from deficit to surplus, and optimism that China’s slowdown in commodity demand is a short-term hiccup.
Layered on top of the interest rate chatter and the changing tide of trade was news that China might restimulate its economy to avoid any chance of social dislocation from the economic slowdown.
Dryblower will not waste too much time discussing domestic interest rates except to say that high rates in a low-risk country always attract flows of hot money. Nor will he bother too much with China because it is a country marching to its own beat.
What is worth bothering about is that terms-of-trade issue, because countries that sell more than they buy invariably have a high exchange rate. While Australia once ran a huge current account deficit thanks to the cost of equipment to build big resource projects, it is now enjoying the inbound cash flow from selling the resources being produced by the imported equipment.
Miners, naturally, think only of new mines such as the massive development of the Pilbara and its iron ore projects.
Look a bit further, is what Dryblower suggests.
Consider the inevitable impact of the oil and gas boom gathering strength around the coast, as seven (yes, seven) new LNG projects get ready to start production and Australia snatches top spot as the world’s biggest exporter.
The terms of trade, the production phase of the resources boom, is what is driving the Aussie dollar higher. While gold miners and other exporters may lament the return of a rising currency, it will be wise to prepare for parity, and beyond.