So once again the Australian dollar celebrates Australia Day below US80c … below US79c in fact.
Before 2008 that was the norm: every Australia Day since the float in 1983 had seen the US dollar exchange rate below US80c and the trade weighted index below US66c.
The return of the dollar to under 80/66 after six years of trading between US90c and $US1.05 (apart from the brief collapse to US65c on Australia Day 2009) symbolises better than anything the end of the China commodities boom and the return of the American technology boom.
In January 2000, before China joined the World Trade Organisation and before the Nasdaq bubble collapsed, the Aussie was US65c, heading for US55c a year later. The Reserve Bank tried to defend it with 1.25 per cent of rate hikes in 2000, but the forex market knew better: it was an obvious short.
Now the Nasdaq is back at 4700 and American technology, led by Silicon Valley, is rampant once more, while Chinese growth is back below 8 per cent, as it was in 2000. Once again a lower Aussie is one of the world’s more obvious forex trades, but this time the RBA will not defend it. In fact, it wants the Australian dollar lower, so one or two rate cuts are more likely.
As in 2000, but unlike 2009, this does not mean there is a crisis, although the odds of a recession are increasing.
Instead, Australia faces a grinding adjustment in real wages, with the exchange rate continuing to fall along with interest rates -- policy and market rates.
The Australian 10-year bond yield is 120 basis points above Canada’s and 80 bps above America’s. That is a hangover from the commodity boom and can no longer be justified, so Australia’s rate structure is heading lower – in fact unless commodity prices recover quickly the 10-year bond yield could well fall below the US’.
And that’s why we probably won’t have a recession in 2015. The markets will likely do the work of quantitative easing for the RBA -- the central bank won’t have to print money and buy bonds as the US Federal Reserve did and the European Central Bank is now doing, because the bond yield and the currency will both go down anyway. And that, after all, is what QE is for: to get bond yields and the exchange rate down.
The fact that it’s going to happen in Australia without the RBA having to print any money should keep employment going, but while that should keep real GDP growing, national income (which adjusts GDP for changes in the terms of trade) is likely to fall this year, and with it house prices, which have already started to adjust.