Australia must brace for currency shocks: Gottliebsen

As we prepare to see the Australian dollar reach parity with the US and then rise further, we can now isolate some of the forces driving our currency. And at the same time Australians should be ready for carnage in not just universities, tourism and manufacturing, but in a wider range of areas including apartments.

We can recover from some of that carnage but the looming decimation of our universities will take a decade or so to repair.

For some years, the Australian dollar has had a unique relationship with China because when we measure our trade-weighted index, the long term graph correlates very closely with Chinese electricity production.

The HSBC Bank has pioneered research work on this trend and right up until mid-September, the Australian TWI has been tracking Chinese electricity production. The currency markets have seen Australia as a virtual state of China.

We don’t have figures for the last few weeks, but unless there has been an enormous boom in China (which has not happened) it is clear that our dollar is now moving out of its long term trend. Given the fact that historically our currency is so closely linked to China, we are useful benchmark as to what is really happening.

At the beginning of September the Australian TWI was not that different to the level of January 1. Since then it has jumped around 6 per cent and my guess is that this is faster than Chinese electricity production and shows that our currency is moving ahead of our trading partners – hence the dangers.

The rise against the US dollar since the start of September has been around 11% and against the Chinese yuan it has been about 8%.

If we go back to the June lows the Australian dollar has appreciated around 22% against the US dollar; almost 19 per cent against the yuan and our TWI has risen around 12.5%.

China is petrified about the effects on its local economy if its currency moved by amounts like that. We must be ready for a similar disaster in parts of our economy. But of course mineral prices are high and import prices are falling so we say “she’ll be right”.

Very few other countries are taking that attitude – hence global concern at the effects of the US decision to flood the world with US dollars and the Chinese decision not to decouple is currency from the US dollar.

Of course Martin Wolf of the Financial Times says China will lose this war. Let’s hope the war does not last for a long period.

This article first appeared on Business Spectator.