two cheers for a strong AUD

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The reporting of recent AUD strength is getting a little unbalanced. See here for an example.

This tone really gets to me. Movements in the foreign exchange value of the AUD (like movements in any relative price) create winners and losers. A stronger AUD typically will create losers among those who sell in foreign currency terms (a given amount of foreign exchange buys less AUD), and winners among those who are buyers in foreign currency terms (their AUD buys more foreign exchange).

The vast majority of Australians are consumers and the increase in the AUD has been the primary means by which their standard of living has been raised by the mining boom (fuel would be over A$2.5 per litre if the AUD was ~0.50, for example).

It is double counting in a sense, but i think it’s worth recognising that most Australian households are net debtors, and at least considering that rates would be higher if the AUD was weaker. The reason i say this is that the stronger AUD has been a part of the reason that inflation has been (and is likely to remain) very low. Thanks to the strong AUD, the RBA has been free to cut its policy rate.

So who loses – those that make their money selling stuff overseas. The vast majority of Australian exports are mining commodities, and the strong AUD is in part a reflection of these high prices, so it is doubtful that they are losers at all.

There are of course a few other losers – import competing industries have had their competition essentially ‘get a price discount’, and they are struggling. There are also some minor other exporters (manufacturing, for example).

If you work for one of these firms, you are probably at risk of losing your job, and that’s not a nice thing. No government could protect any industry from these relative price shifts – and it’s fair to note that is their good fortune to have this bad experience in an economy that’s doing pretty well … mostly thanks to mining … which is why the AUD is strong.

The complaint about foreigners buying our bonds strikes me as weird – since when has it been a bad thing that our credit is strong?

Why is it bad that someone wants to lend us money for 10 years at 2.75% (probably a zero real yield in realised terms).

The AUD moves to equate the excess Australian demand for foreign goods and services with the excess foreign demand for financial claims on Australia. The AUD is strong because we have lots of stuff that folks want to buy – and because of that, folks want to invest their capital in our strong businesses (or an average of Australian firms, which is what you get when you buy any Government bond as it’s a claim on future taxation revenues).

Yes, there are losers in this process – but every relative price shift creates winners and losers. I fear that (just like in the tariff debates) the concentrated ‘losers’ (the exporters) are getting too much pity.

The vast majority of ordinary Australians are winners from the stronger AUD. Even if it is partly by accident, it is nice to see the consumer join the ranks of the diffuse ‘winners’ – especially given that if follows decades where special interests were fattened by hidden taxes on consumers in the form of tariffs and quotas.

Why not three cheers? well, I hate to see anyone lose their job…


  1. I will also add that I am glad someone is putting macrobusiness under the spotlight.

    Their general doom and gloom represents probably the most unbalanced reporting of economics and finance matters in Australia. They think the bulls are bad?

    Thankfully there are blogs such as yours around!

    1. Nonsense.

      Ricardo’s view has been dominant amongst policymakers in Treasury, the RBA, government and opposition for many years now. Until macrobusiness came along the idea that the strong dollar might actually have some downsides was an opinion that was almost never heard.

      1. Nonsense. Corden et al hit upon the Dutch Disease idea well before, now appears Corden’s views (as to remedy, if any) have shifted in a materially substantive way.

      2. I don’t recall Bob Gregory getting much of a run in the media during the dollar’s spectacular rise. Most of what I read in the media was little better than cheerleading.

        Its only been in the past 6-12 months — with numerous business closures and layoffs — that the strong Australian dollar has been portrayed as anything but a positive in the media.

        1. Your example is exactly the point. The unemployment rate has been broadly steady for about two years. There have been high profile closures, but despite this things have been basically stable (thanks to a few timely rate cuts). The fact is that over ~3% of jobs end each month. Strong or weak growth is a small margin above or below the job destruction number for gross job creation. The labour market is a lot more dynamic than folks recognise.

          Sent from my iPad

    2. Unless one of you is Bob Gregory. Double lol. Will be seeing Professor Corden at a soiree in Perth end of next week, might ask the question! Cheers.

    3. Macrobusiness is more than a bit predictable at times. Gets a bit boring when you know what someone is going to say before you open the link.

      1. That is true of virtually all economic commentators and blogs. There are very few that surprise me.

  2. Agree with you Ricardo. People are blaming the high AUD for the low NGDP growth we have experienced the last few years, which is really the fault of tight monetary policy. The low NGDP growth makes it harder for workers in import-competing sectors to take real wage cuts; hence jobs losses. If we had 6% NGDP growth instead of 4%, people would be a lot happier, even if home loan rates were also higher.

  3. Sure, we’re all winners as long as we can be certain demand for our resources will continue to be strong for many decades to come. Otherwise our trade-exposed non-resource sectors will be weakened to such a point they will never recover.

    I wonder how Australia will earn a living in a post-resources boom world. We can’t survive selling services to each other.

    1. Reminds me of the stuff the car manufacturers would say when we were cutting their tariff protection.

      The reality is that we have never had a problem with resource re-allocation before – the big problems with resource allocation have all been created by the government ‘picking winners’ (or losers picking the government). I see no reason to think that we would do any better with tinkering this time.

      We have low rates and large capital inflows. We ought to be having a broad investment boom – capital goods have never been so cheap (especially as many are made overseas and priced in AUD terms).

      That we are having a narrow one reflects, in part, the poor state of micro-economic policy.

      1. Its not the structural adjustment that’s the problem, its the pace of the adjustment. Businesses can adjust to gradual tariff reductions, they can’t adjust to a doubling of the currency in 5 years (2002-2007). They just close, and the skills are lost.

        The investment boom is narrow because the strong dollar has made us hopelessly uncompetitive in every sector apart from mining. What on earth would we use this cheap capital for apart from dirt-digging? Even well-managed, innovative businesses such as Cochlear are barely able to maintain their margins against the rising currency. They are investing millions just to stand still! Hopefully they can ride out the storm, but most trade-exposed businesses are nowhere near as well placed as Cochlear and are simply wiped out.

        Better micro economic policy would not change this reality. One wonders what miracle of economic policy could offset a doubling of the exchange rate anyway.

        You guys really need to get out more.

        1. The productivity miracle is about 10bps per month. There are any number of ways in which a growing government regulates this away. There are acres of legislation that ought to be simplified.

          My starting point would be a single minimum award – but others have very good ideas also.

          Sent from my iPad

      2. I don’t think you can blame our lack of a broad investment boom – or lack of economic growth generally – on our poor micro environment. That might be possible if (sorry to sound like a broken record) NGDP was running at 6-7% and inflation was at 4-5%. That would imply that the micro environment was really stuffed. But at the moment, NGDP is 4% and the bond market is pointing to lower. So why would anyone invest with private interest rates at 6%? Look at housing as a proxy for all non-mining investment. Despite a supposed underlying shortage and ongoing population growth, prices are only just starting to stabilise. There won’t be a broader investment boom unless and until the RBA decides to allow one. That is only just starting to happen now.

  4. Good post and a timely reminder. Winners and losers whichever way AUD moves. The strong dollar has been of overwhelming benefit to the majority of Australians – this is not to understate the pain experienced by those that lose jobs in trade exposed sectors, but truth is, relatively speaking this has been kept to a minimum.

      1. lol. I didn’t realise your serial gloom did either. The is a good little blog, have followed it for a while now.

      2. Apologies to Ricardo, but time to put something to bed. Lorax. I am involved the resources sector currently based in Perth. You called MB an anti-mining site. There is indeed very strong leaning from its majority green left commentariat in that direction. Defending the resources sector (my livelihood and an important sector in the Australian economy) from almost daily derision does not make me an ‘astroturfer’. Alas elements utilise the old tactic of ridicule in an attempt to diminish argument and the lackeys jump on board. So my friend, get over it. No astroturfing here mate! I have no intention of discussing this again.

      3. Ricardo: The comment wasn’t aimed at you.

        3d1k: Are you explicitly denying you are paid by the resources sector to promote its interests on blogs? As I understand it you have been given the opportunity to do this in the past and you haven’t.

  5. Agree R, the most interesting story is why the flood of capital that is boosting the AUD has not caused a broader investment boom – but perhaps you are just being a little impatient?

  6. Thankfully there are many reasons to think the AUD has diverged from fundamentals, and a snap back to more sane levels is inevitable. Chinese steel prices are surely telling us something?

    FT: China Steel prices hit record low

    Currency markets over shoot in both directions, and with the AUD being a commodity currency the move down is unlikely to be gentle. Thankfully we still have diverse mixed economy that can respond to the opportunities offered by a lower currency and lower commodity prices … oh, wait.

    1. I saw DLSs post on ‘delinking’ yesterday. To early to call for mine – EU and Qe3 requiring direction, necessity to maintain momentum in China leading to leadership transition, lead-in time for stimulus measures to take effect. That is not to say a little fluctuation in pricing will not occur. In any case if commodity boom busts, the convergence will soon re-establish!

      1. I don’t see it myself. Seems another case of a sell-side chart that never was…

        Why is there an equilibrium relationship between a single good’s price and AUD FX? The AUD balances our net demand for foreign goods with the net demand for financial claims on Australia.

        There is no a priori reason to suppose that the AUD and Iron Ore prices are cointegrated (esp over any long period of time).

        Sent from my iPad

      2. My assumption is that DLSs call was based on his view that the current AUD strength is entirely commodity related, boom over dollar down, hence cointregration. However, recognition that central banks are buying and a belated acceptance of FX/carry trade, despite (modest) commodity price declines have given rise to ‘delinking’.

        1. You can add to your list the supply response – both increased volumes of existing lines, and the addition of new export lines such as LNG.

      3. Ricardo: Are you suggesting there’s no link between the price of the commodities we sell and our exchange rate?

        Besides, its not just steel prices that are considerably weaker in 2012. All our major commodity exports — Iron ore, coking coal, thermal coal and natural gas — are well off their post-GFC highs.

        You know things are a bit grim when the likes of 3d1k start calling for Chinese stimulus. Strangely our policymakers don’t see any risk in our economic future being utterly dependent on an unprecedented fixed asset investment boom managed by communists! We’re supposed to let the free market run its course and force the adjustment on our trade exposed sectors via currency appreciation, but the driving force behind the adjustment is anything but free.

        1. Of course there is a link – i am just saying that we need to look at more broadly, at both prices and quantities – as well as the supply and demand for financial assets.

          Iron ore prices ‘worked’ as it was the thing that was changing quickly – now there is a supply response so volumes of iron ore matter too.

          As does the development of new export lines…

          Sent from my iPad

    2. The most important market to have free and flexible on the way ‘down’ is the labour market. It is the most moral market to reform as protection means the most vulnerable become unemployed on the way down.

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