Australia is suffering a similar fate to Switzerland, where the Swiss Franc soared against the Euro during the Eurozone sovereign debt crisis. Flight to safety caused the Franc to rocket, threatening local manufacturing industry. Exporters were priced out of international markets while imports were undercutting local suppliers. The Swiss National Bank (SNB) did not sit on its hands but pledged to maintain an effective currency peg against the Euro. Catherine Bosley at Bloomberg writes:
The Swiss central bank pledged to keep up its defense of the franc cap after almost doubling its currency holdings to shield the country from the fallout caused by the euro zone’s crisis.
The Swiss National Bank cut its forecasts for inflation and said it will take all necessary measures to keep the “high” franc within the limit of 1.20 per euro……
The SNB, led by President Thomas Jordan, put the ceiling in place in September 2011 after investors pushed the franc close to parity with the euro and threatened to choke off growth. The central bank’s campaign to defend the cap has led to foreign currency holdings ballooning to more than 400 billion francs, almost three quarters of annual output. It spent 188 billion francs on interventions last year, 10 times the 2011 amount.
Australia’s position is in some ways even worse than Switzerland. Not only do international investors increasingly view the Australian Dollar as a safe haven, with higher bond yields and a stable economy, but booming mining exports have caused a bad case of Dutch Disease — rising exports killing local manufacturing and service industries such as tourism and education.
While not suggesting that the RBA accumulate huge holdings of greenbacks and euros — these are depreciating currencies, with central banks engaged in widespread QE — but the idea of a sovereign wealth fund is appealing. Investing in international equities is a risky business that would cause most central bankers to tremble, but sovereign wealth funds have been successfully run by Norway, China, Abu Dhabi, Saudi Arabia, Singapore and others. Far safer than international equities would be to buy Australian international debt, targeting the roughly $400 billion owed to foreign investors by major Australian banks.
The appeal would be two-fold: eliminate currency risk while generating a stable return on investment.
Printing more dollars, whether you spend them locally or offshore, will normally increase inflation risk. But with high local savings rates and slowing rates of debt growth, deflationary pressures are rising. The only real inflationary pressure is from higher oil prices. So the RBA has room to maneuver.
A weaker Australian dollar would make exporters more competitive and rescue local manufacturers from international competition. Tourism and education, formerly major export earners, would hopefully recover from the belting they have taken in recent years. Miners would also not complain as a weaker dollar would boost profit margins.
Read more at SNB Keeps Up Franc Defense as Euro Crisis Risks Persist – Bloomberg.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He co-founded Incredible Charts and writes the popular Trading Diary and Patient Investor newsletters.
Using a top-down approach, Colin identifies key macro trends in the global economy before evaluating selected opportunities using a combination of fundamental and technical analysis.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.
He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.
