The Euro broke out above its trend channel and resistance at $1.2750 on the daily chart to signal a primary up-trend. Recovery of 63-day Twiggs Momentum above zero confirms. Target for the advance is the 2012 high of $1.35*.
* Target calculation: 1.275 + ( 1.275 – 1.20 ) = 1.35
Pound Sterling is correcting to support around €1.22 against the Euro. Breach of the rising trendline would warn that a top is forming, while retreat of 63-day Twiggs Momentum below zero would indicate a primary down-trend.
Canada’s Loonie is retracing to test the new support level after breaking above resistance against the greenback at $1.02. Breakout confirms the primary up-trend indicated by long-term bullish divergence on 63-day Twiggs Momentum. Target for the advance is $1.08*.
* Target calculation: 1.02 +( 1.02 – 0.96 ) = 1.08
The Aussie Dollar is testing resistance at $1.06 against the greenback. The 63-day Twiggs Momentum trough above zero signals a primary up-trend. Breakout above $1.06 would confirm. Expect resistance at $1.075/$1.08, but target for an advance would be $1.10*.
* Target calculation: 1.06 + ( 1.06 – 1.02 ) = 1.10
I commented a few days ago that apart from a bad case of Dutch Disease — where capital inflows and increased revenues from resources projects drive up the exchange rate and harm other export industries — the Australian dollar is at risk of developing “Swiss Disease” — where flight to a safe haven currency also drives up the exchange rate, destroying local export industries. Professor Warwick McKibbin has a point:
“When a portfolio shift into Australian currency is observed, the exchange rate change should be completely offset so the shock only affects the money markets rather than the real economy. If the shock cannot be observed precisely then the central bank should “lean against the wind”, that is intervene to slow down the extent of appreciation of the exchange rate.”
The RBA should be selling dollars to protect local export industries from rapid appreciation of the currency.
The Aussie Dollar is headed for resistance at ¥83.50 against the Japanese Yen. Recovery of 63-Day Twiggs Momentum above zero indicates a primary up-trend. Breakout would signal an advance to ¥88*.
* Target calculation: 84 + ( 84 – 80 ) = 88
The illogical;increase in the Australian dollar is scary. The damage to agriculture and manufacturing should be accepted and corrected.
Brian M
Does the learned professor suggest what the RBA should buy with our Aussie dollars? Greenbacks, maybe, or Euros??? All that would happen is that the hedge funds would get all the Aussie dollars and the Aussie taxpayer would be left holding a pile of worthless rubbish. And any dollar relief would only be temporary: the hedge funds would eat the RBA for breakfast
The Swiss have bought tons of euros because they have no choice. Australia has to look at its trading partners….. and the currencies they are pegged to.
Colin, in today’s Trading Diary on Forex you state:
“I commented a few days ago that apart from a bad case of Dutch Disease — where capital inflows and increased revenues from resources projects drive up the exchange rate and harm other export industries — the Australian dollar is at risk of developing “Swiss Disease” — where flight to a safe haven currency also drives up the exchange rate, destroying local export industries. Professor Warwick McKibbin has a point:
“When a portfolio shift into Australian currency is observed, the exchange rate change should be completely offset so the shock only affects the money markets rather than the real economy. If the shock cannot be observed precisely then the central bank should ‘lean against the wind’, that is intervene to slow down the extent of appreciation of the exchange rate.”
The RBA should be selling dollars to protect local export industries from rapid appreciation of the currency.”
I ask you for tour reply/input to the following questions :
1.Is there any evidence that a strong (weak) currency with no or little manipulation benefits ( weakens) the broad economy?
There is plenty of historical economic evidence that a strong currency relative to others is of significant benefit to the broad economy. Domestic production and productivity will increase over time because firms need do whatever they need to become sufficiently efficient, survive and then prosper. The inefficient firms who cant and or wont improve their efficiency should be allowed to fail so that capital can be properly allocated to the more efficient firms.
2. Lowering the real value of a currency can only be done by devaluing it i.e. printing money or creating money out of thin air , nowadays called QE. I prefer to call it counterfeit money because that is exactly what it is.
At what point would one decide when to terminate the currency devaluation and what specific criteria would be appropriate to assess in any attempt to do so? Secondly would such criteria be limited to Australian sourced ( beggar thy neighbour). if so would not our major trading partners have some concern if Australia pursued significant currency devaluation without their “disguised’ consent? What would be the reaction of Chinese, European exporters be do you think and do if there were widespread international currency devaluation as is practised nowadays?
3. The only way the Aussie dollar will be meaningfully devalued such that it ‘protects’ the export industries is that the devaluation must be greater than the rate of devaluation by our major trading partners with which we trade and in particular the US as its currency dollar is used to set prices for commodities are internationally dominated commodities. THe US true money stock has been devalued at the average rate of 10% PA over the last several years and the pace of devaluation will very likely increase in future months and years based on the latest FOMC meeting at the US Federal Reserve.
If Australia joins the international race to devalue (weaken) the local currency then are we not entering into a currency war? What happens when Australia’ and its major trading partners see little if any major shift in the relative value of their currencies? Do we start devaluing the $A at a faster rate first or we we wait for The US and others to do so and then we play catch up?
Only those countries that devalue the most may achieve a temporary gain but will be badly hurt over the longer term. this is because of price inflation and asset bubble creation based on the historical evidence.
4. is there any evidence that an international currency policy of currency devaluation is good for increasing the real wealth of the countries involved?
5. Australia has a growing government (State and Federal) debt . Private sector debt and especially Consumer debt as a percentage of GDP is one of the highest in the world as i understand it – mostly sourced by lending by the big 4 commercial banks. Much of the funding requirements of such banks come from the overseas wholesale market ( about 40% on average i understand).
What will be impact on interest and principal repayments by Australia of such overseas debt to the international lenders? In addition , do think such impact would likely include an upward movement in Australia’s interest rate over the medium/ longer term?
6 When a currency is devalued significantly then it is true that the export sector may be benefit for a while but domestic ally focussed industries are harmed as is the Australian consumer. Most ( the vast majority i would think) of our consumption goods come from overseas so consumers will pay more for the same consumption goods . Firms will need to spend more money for capital investment than priced before the devaluation and will suspend if not cancel any future investment plans as the cost of production rises and they are unable to raise the real price of their goods in a softening economy to make an adequate return on capital This means that the nation’s real wealth will fall. The export sector employs a small percentage of the export sector with mining about 3% and agriculture less than 10% if i recall correctly. Moreover mining companies such as BHP and Rio amongst others have cancelled or suspended large planned investments and indeed BHP is selling assets. In short the mining sector is growing weaker because those countries that buy their product are buying less. The global economy is slowing and this will likely continue for much of this decade and beyond at a worsening rate if current policies including but not limited to currency devaluation are continuously pursued ( whilst admitting that this worsening may be temporarily interrupted by economic growth by way of stimulus such as currency devaluation (QE)as seemingly advocated by you and McKibbin.
Since the vast majority of private sector Australian workers are employed in firms producing goods and services for the Australian economy. What specific benefits do you see for such workers and consumers by way of a currency devaluation?
7. By targeting the export sector the Central Bank and government are manipulating the allocation of scarce real capital.
Is that their mandate?
Our unemployment rate is pretty good especially when compared internationally. Where,how and who will precisely benefit from a meaningful currency devaluation over the longer term practised by most countries especially the Anglo Saxon counties in the past several years ( even John Howard’s government printed large doses of new currency from thin air). Please remember that it is very difficult if not virtually impossible to reverse a significant currency devaluation and then only after suffering sever economic pain as the historical evidence shows.
I will end my commentary with a few selected extracts from a paper authored by Ludwig Von Mises titled “The Objectives of Currency Devaluation”.
“This effect ( of currency devaluation)may appear as a boon in the opinion of those for whom the balance of trade is the yardstick of a nation’s welfare. In plain language it is to be described in this way: the British citizen must export more British goods in order to buy that quantity of tea which he received before the devaluation for a smaller quantity of exported British goods.”
“The devaluation, say its champions, reduces the burden of debts. This is certainly true. It favors debtors at the expense of creditors. In the eyes of those who still have not learned that under modern conditions the creditors must not be identified with the rich nor the debtors with the poor, this is beneficial.
The actual effect is that the indebted owners of real estate and farmland and the shareholders of indebted corporations are helped to the disadvantage of the enormous majority whose savings are invested in bonds, debentures, savings-bank deposits, and insurance policies.”
the link to the whole article follows and whilst it deals with The Great Depression when economic conditions/ circumstances are different than that of today IMO the same basic thrust/principles apply in today’s world. a search on currency devaluation, printing money or Quantitative Easing should bring up additional articles on the subject.
http://mises.org/daily/5927/The-Objectives-of-Currency-Devaluation
Regards
Robert, I appreciate the time that you have taken with your comments but, if you don’t keep them short, few will read them.
To protect against Dutch Disease decimating local industries one is faced with three choices:
To protect against “Swiss disease” you have three choices:
If you opt for option 3 in the belief that the market knows best, with Dutch disease you could have a scenario where the boom is followed by a bust and you have no resources sector and no local industry to support you. It is not only export industries that suffer: local manufacturers are undercut by cheap imports. With Swiss disease you get the same result. Ask yourself what benefit the US has received from more than $2 trillion of bond purchases by China and Japan, other than the loss of 30 million manufacturing jobs and an accelerant applied to the sub-prime bonfire. When the Fed raised short-term rates, long-term rates failed to respond because of the weight of bond purchases from Beijing. If you don’t control your currency, someone else will.
The Swiss are the most conservative economic managers, probably on this planet. They only went off the gold standard in 2000. It is interesting studying their reasons for removing the link to gold. What is also interesting is that they recently considered floating a new gold coin in parallel to the Swiss Franc — as a destination for safe haven funds.
Because of our diminutive economic size vis a vis the USA, Europe and the UK, Japan and China, Australia has always been, and still remains, a price taker, not a price maker.
We are in no position to dictate the price of our floated $A.
We are in no position to create a negative interest rate.
It is not in our best interests to restrict our resources export industry.
We are left to watch, in sadness, the decimation of our established industries, since as Gina was trying to point out it will not be possible to compete in wages against $2.00 per day.
We still have to control our currency, otherwise someone else will. The Swiss are also a small country and were subjected to far larger capital inflows than Australia. Yet they succeeded in preventing further appreciation of the Swiss Franc.