There might be two reasons why I could be wrong on my call that the Reserve Bank won’t easily give in and cut interest rates. You see, I think our economy is getting stronger, albeit slowly, but I do worry about, say, a China drama event and that damn Oz dollar!
Overnight, our currency went to 72 US cents, which might make overseas travellers cheer but, as a stimulant to growth, a lower dollar is an absolute bottler. A big part of my positivity on our economy is linked to the weaker dollar, the tips that it will go to the mid-60s region and the growth it creates.
Also, a rising dollar is not good for investors, who have been piling into overseas investments, unhedged, because they thought there was easy money to be made just picking up on the depreciation pay off. If our dollar trends higher, because we look like we won’t cut interest rates and the Fed is delaying its first rate rise, which pushed the greenback lower, then it could slow down our economic improvement.
If that happens, I’d change my mind and encourage the RBA to cut rates to offset any appreciation.
That said, I won’t jump the gun on that possible change of mind because we have had a nice drop in our dollar.
As you can see from this chart, we were at around 94 US cents only 13 months ago. Even at 72 US cents, that’s a 23% depreciation. Over a two-year stretch, the currency slide has been 25%, which should be an enormous boost to businesses in export and import-competition sectors.
Remember, despite some negative views by some economists, who think one or two rate cuts are needed and are coming, we currently have record car sales and building approvals, with the latter good for future construction and jobs. Job ads are up 14 out of 16 months and employment growth is the best in four and a half years! Meanwhile, both readings on the manufacturing and services sectors are in the expansion territory, which are nice signs for future growth and it underlines the stimulus from a lower dollar.
The current 2% growth has come out of the slowing of the investment linked to the end of the mining boom, and the long period where our dollar was too high. The latter happened because the world cut interest rates, virtually to zero, because their economies were screwed while ours was pretty damn good.
The RBA kept rates too high for too long, which kept the Oz dollar too high for too long. That’s why we’re growing sub-3% now. We need 3% plus growth to help bring the jobless rate down and that’s why I want a lower dollar.
Yeah, I know, it makes my overseas trip at Christmas more expensive but I’m happy to bleed for my economy and my fellow out-of-work Ausssies. There will also be a pay off for me in that the lower dollar should help profits, then share prices and then my super fund heads higher!
I guess if that damn dollar heads higher, the dollar drama could focus on Cup Day as the RBA has often moved rates when we’re all off to the races, which might mean those with home loans who lose on the big race could get a nice dividend from Glenn Stevens.
And while everyone likes to pay less on their home loans, if the Big Bank cuts rates, it will bring out bad news headlines and that would be bad news for the economy!
Of course, Glenn Stevens, the RBA boss, could cut rates and say that he thinks the Oz economy is doing well. However, a rising dollar (because the Fed is gutless) has forced his hand to ensure our economy keeps improving, but he’s far too gracious to be as rude as Peter Switzer.
It’s a nice characteristic but it could be damaging to our economy. So I’m praying for a lower dollar and/or a more aggressive, ruder Glenn Stevens. Unfortunately, I suspect only one of these options is possible!
By the way, oil and material stocks did well on higher prices overnight on the lower greenback and the Dow was up about 13 points. We could be in for another good day for stocks and, if we can beat and stay above 5200, it will hearten a lot of professional players.
Finally, George Bourbouras of Contango Asset Management expects a good finish for stocks as the final quarter proceeds towards my beloved Santa Claus rally. I hope George’s calculations are on the money.
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