Wednesday, May 29, 2013

The Collapse of the Australian Dollar and What it Means

This is becoming a major story.
From FT Alphaville:

Down, down, deeper and down
We are, of course, talking about the Australian dollar — now going head to head with the Syrian pound for the title of the world’s worst performing currency.
The latest drop follows a call from Pimco of even lower interest rates.
In 2012, engineering construction, which is primarily mining investment, contributed 1.9% to total real GDP growth of 3.1% (Figure 1). As this growth engine begins to fade away over the balance of 2013 and likely detracts from growth in 2014, Australia must turn to other sources of domestic demand to fill the economic hole.

The peak in mining investment comes as Australia’s economy already faces a significant challenge. On the nominal side, the end of the boom in bulk commodity prices has put pressure on the terms of trade, which is likely to continue as China’s growth moderates and Chinese policymakers attempt to transform their growth model away from infrastructure investment towards consumption. This will continue to put pressure on Australia’s national income growth – already at low levels rarely seen outside recessions.
So what will fill the hole left by the passing of the resource investment boom, asks Pimco? Housing construction, non-mining business investment, household consumption?...MORE
As the FT put it last week:
Australia outlines impact of resources pullback
Australian resource projects worth A$150bn ($146bn) have been cancelled or delayed over the past year as companies have scaled back expansion plans to focus on reducing overheads and improving productivity, according to official data from the government’s commodities forecaster.

The statistics, released on Wednesday by the Bureau for Energy and Research Economics (BREE), highlight the new mood of conservatism sweeping the mining industry, which has been criticised for wasting shareholders’ money on overpriced acquisitions and risky projects....MORE
That is getting to be real money.
Here's the PIMCO Australia Perspectives report: "Filling the hole we have dug"
Going back to last August:
Marc Faber Turns His "Gaze of Doom" On Australia
And this month:
What a Weakening Australian Dollar Means for the Mining Industry (BHP; RIO)