After The Parity Party

Who Benefits More From The Devalued Dollar?

Late last week, RBA boss talked the AUD down, and then quite spectacularly, the Aussie dollar fell through the 90cents barrier.

A new round of jawboning on the need for a lower exchange rate by the Reserve Bank governor Glenn Stevens pushed the currency below US90¢ on Friday, and the dollar could face further headwinds when the central bank releases its December meeting minutes on Tuesday.

The RBA’s assistant governor Guy Debelle is set to speak at a banking and finance conference in Sydney on the same day, while Mr Stevens fronts the House of Representatives’ Standing Committee on Economics in Canberra on Wednesday.

Both central bank officials have talked down the local currency in recent weeks, stressing that a lower dollar is needed to support growth in export-facing sectors of the economy as mining investment peaks.

“It’s a market that seems to be responsive to jawboning,” Westpac senior currency strategist Sean Callow said about the recent declines in the Australian dollar.“If it was a couple of years ago, I think the market would have brushed off such talk, but it seems there are still investors who will sell it on jawboning, even though the domestic story really isn’t presenting a very compelling case to sell the [Australian dollar].”

The currency could face further headwinds in the form of the federal government’s Mid Year Economic and Fiscal Outlook. It will be released on Tuesday and is expected to reveal increased budget deficits.

Which goes to show the markets are jittery ahead of the possible taper from the QE3. The valuation of the Aussie dollar has been one of those interesting concerns for the past few months because we keep hearing that Australian manufacturing can’t continue withe the Australian Dollar so high. Well, it’s lost close to 15% since the days it was trading at US$1.08, so you have to figure that 90cents was a reasonable level for the AUD to sit. It’s not like the RBA is willing to cut interest rates further from historic lows, so it figures that there would still be enough in the carry trade to make it worth while holding Australian Dollars – not that I’m any expert.

Anyway, in that context, this interesting article floated into view.

“I don’t see why the RBA wants to see the global purchasing power of Australians reduced by 20 per cent in exchange for one percentage point of extra growth,” Mr White told The Australian Financial Review.

Mr White says “targeted deprecation policy” amounts to “a transfer from households through imported inflation to firms through higher profitability,” pointing to rising food and fuel costs as a result of the weaker currency.

“The bottom 50 per cent of income earners have the highest proportion of imported products in their spend,” says White.

“The data would suggest at least 80 per cent of that 50 per cent work in domestic services so they won’t benefit from the increased competitiveness but they will suffer from [things like] higher petrol prices.

“I think moving away from mining investment is a good thing but the weak $A isn’t going to get us there, it will just make Australian mining more competitive,” he says.

Mr White believes there have been fundamental changes in the composition of the economy that should force a rethink in conventional application of policy.

“The structure of the economy has changed. If we were a manufacturing economy, a weak currency would help us but we are not we are a service economy. We don’t have the substitution industries to take advantage of the falling dollar,” he says.

Now, that’s interesting because it has been something of an axiom that the Australian Dollar had to come down, and that it would be good for everybody. I’ve always wondered what the fuel costs would be like under an AUD that fell 20% in value would mean a 25% increase in the same thing.

As in, if the AUD went from 1.00 to 0.80, then  you would need 1.25 times the currency to get the same purchasing power as before. That’s a 25% inflation on imported goods being slapped on right there. Any drop in percentage will have to be reflected in a larger number in inflation. So if the RBA really was looking for say,a maximum 3% inflation, it couldn’t be asking for more than a 2.9% drop.

Now, of course there are things that would and should go down as a result of the Australian Dollar dropping in value, but if you’re already trading in Australian Dollars, it’s not going to help. So from the consumer’s point of view, this James White is correct, the fall in AUD is in fact robbing us of our purchasing power, while the benefits of the fall are likely to go right by us. Like this James White fellow I’m yet to figure out how the 20% drop for the sake of 1% growth is really all that a great trade off, especially if it’s courting a 20% inflation of imported products.

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