It is very inconvenient that the US dollar has stopped rising and the Australian dollar has stopped falling.
February so far has seen a turnaround in each of them, so that the Australian dollar index is back up to where it was six months ago and the US dollar index is now unchanged over one and two years, despite some volatility within each year.
The sustained US dollar bull market in response to the improving American economy and the tightening of monetary policy has simply not happened as expected.
The result is an Aussie dollar stuck at 90 cents with unemployment at 6 per cent. And with the Federal Treasurer Joe Hockey apparently working on the traditional tough first budget (while it can still be blamed on the previous government), the Reserve Bank “stands virtually alone in being able to provide policy support for the economy”, as Stephen Walters of JP Morgan wrote last week.
US unemployment is now 6.6 per cent and falling fast. With no change in interest rates, tighter fiscal policy and an exchange rate stuck in the '90s, Australia’s unemployment rate will be higher than America’s by year-end.
It’s a rich irony, by the way, that a big part of the reason the 2014 forecast budget deficit has blown out to 3 per cent from the 1.9 per cent estimated just before the 2013 election – putting more pressure on monetary policy – is that the Government gave the Reserve Bank $8.8 billion for some reason.
That was the main reason behind a $12.4 billion increase in 2014 cash payments between the Pre-election Economic and Fiscal Outlook in August and the Mid-Year Economic and Fiscal Outlook in December; the rest were the Coalition’s election promises.
The fact that Joe Hockey is going to crunch government expenditure to reverse the deficit increase he caused while he can still blame Labor for it – and therefore maintain our position as one of only 10 countries with a AAA credit rating from all three ratings agencies – is an important part of the reason the Australian dollar remains strong.
Not that I’m suggesting the treasurer should let the deficit get worse to target a lower credit rating, but there is no doubt that Australia’s triple-triple A puts upward pressure on the dollar by attracting portfolio capital from funds with a AAA mandate.
That’s especially so with the US still only rated AA by Standard & Poor’s.
Fiscal austerity and interest rates on hold mean that to get the currency down to support manufacturing and agricultural industries and reduce unemployment Australia needs a rise in the US dollar.
That seemed to be happening between November and January when the Aussie dollar depreciated 8.5 per cent but that has stopped in February as slightly weaker-than-expected economic data have raised questions about the course of US monetary policy under Janet Yellen.
So more and more manufacturers and farmers will be pleading for government assistance.
Meanwhile Prime Minister Tony Abbott has abandoned the hard hats and fluorescent vests of factory visits for the Akubras and blue shirts of farm visits. That spells trouble for manufacturers: they’re OUT, farmers are IN.