20 Nov 2012

In bygone days when the USA was an undoubted AAA credit risk, Europe was in self-congratulatory mode about the Euro and Asia was better know for exotic holidays than economic growth, life in Australia was typically predictable. We were seen as a “quarry and a farm” by international investors and the fortunes of the A$ mirrored the outlook for commodities. In the late 1990’s the “dot com” boom had the world’s undivided attention,commodities were yesterday’s news and the Australian dollar sank slowly but inexorably below US 50 cents, touching a low of US48  cents in 2001.

However a combination of the dot com bust in 2001 and the rise and rise of China and India (with their corresponding demand for resources) saw an equally remarkable rebound of the A$ over the next 7 years towards the then tantalising goal of parity with the US dollar. This remarkable run was cut short by the so-called global financial crisis (really trans-Atlantic crisis) and the A$ fell sharply to the low US 60 cent level in 2008-09. This proved to be a temporary set back as the US and Europe continued to flounder, together with Japan, while all eyes turned to Asia, South America and Russia. The A$ recommenced its seemingly unstoppable rise to parity (Oct 2012) and beyond – today it is at US 104 cents having been as high as US 110 cents in 2011.

This last year however has seen something unusual – the A$ has effectively decoupled from commodity prices and followed a different path; as commodity prices have fallen sharply given a less optimistic outlook for global demand, the A$ has remained well above parity with the USD. The reasons for this include the fact that Australia is now one of only nine countries regarded as a “safe AAA” while the unthinkable has happened with the USA downgraded to AA+. Many international inventors such as banks and insurance companies have investment mandates that require a certain percentage of funds be invested in AAA rated securities, and with the USA and many European countries no longer in that category, demand for Australian government bonds has increased dramatically. This in turn has put upward pressure on our exchange rate and explains in part why the A$ remains high even as commodity prices fall.

In this article published in today’s Business Spectator, Stephen Bartholomeusz looks at the implications for Australia if, as predicted, the commodity boom runs its course and the A$ does not perform its usual roll as a shock absorber to cushion the blow. It is a sobering read and goes to the heart of our loss of international competitiveness.  Meanwhile our politicians are preoccupied with what the respective party leaders did or did not do 30 years ago – hardly a tonic for optimism.