The Australian dollar is always regarded as a commodity currency and it took another bashing this week, dropping below $1 against the USD. The collapse of the Aussie dollar below parity against the U.S. dollar is a response to the interest rate cut by Australia's central bank and a larger-than-expected budget deficit which was announced yesterday. The rate cut is indeed a surprise to many investors and MSM but not at all to me because I have argued many times in the past that the current government does not know a thing about economy management.
AUD is in downtrend after stupid budget deficit and slow GDP growth
The treasurer Wayne Swan said that Australia does not need to set up a ‘sovereign wealth fund’ and economy growth is still better than both Europe and the U.S, and that it is well protected from global economy stagnation. Hey, Mr Swan, ‘don’t you know that all markets are inter-connected’?
Let's have a look at the Aussie 2013 Budget report released by him:
1. The nation is facing an expected $60 billion shortfall in revenue over four years to 2015/16 . Note: it will be much much bigger according to my study.
2. In a big surprise to MSM and markets commentators, even after pre-budget warnings of a current $17 billion revenue write-down, he revealed a fiscal shortfall for 2012/13 of $19.4 billion and $24 billion for 2013/2014. The announcement of a $19bn budget deficit causes the total of Labor government deficits over five years to about $192bn. What a joke! - We have all types of natural resources that you can name (except rubber as I used to joke) and yet our economy performance is well below par.
Now, Mr Swan is putting the blame on China’s growth which is facing strong headwind. China's growth of 7.5% currently is still the best in the developed western world. Its growth is still 3 times faster and better than the U.S. I hope the labour voters wake up now – it is time to vote for a change in the upcoming September election. The Liberal government traditionally is a better money manager but I do not support some of their idiotic policies too.
Even with China’s rosy economy for the last 10 years, Mr Swan was never able to bring the budget to surplus despite his last election promise that he would make it positive in his first year (2010) as the government’s treasurer. Surprisingly, he was voted the best treasurer in the developed world in 2011. This is indeed a laughing stock because Australia was sitting in the best position as a commodity-rich country and yet it still has had to face low growth and huge budget deficits for the last 4 years. Thanks but no thanks to Mr Swan. Even with the big advantage of being a country enriched with abundant resources, Australia has never enjoyed prosperity in the last few years in spite of the boom in China and other emerging growing countries like Brazil, India and Russia. In the current time, industries are slow to employ young graduates and small businesses as always are struggling. Even big retailers like Harvey Norman, JB Hi-Fi and Woolworth are struggling. Food and petrol costs are escalating fast but wage increments are dead slow.
Of course, comparatively, Australia is still the most beautiful among the ugliest ducklings because its debt to GDP of about 30% is still one of the lowest in the western world. Debt is low because the government seldom builds (new) or improves much infrastructure. Much debt is spent on unnecessary expenses like social welfare, Medicare and other dull-witted projects. Let me digress for a bit here - some of my friends and relatives (from Malaysia) came to visit me in Sydney and asked me questions like, "Why is Sydney airport so small and don’t you think it looks like a bus terminal?" Also, why is Cityrail so slow and old? Perhaps, it is a blessing in disguise, resulting in comparatively low debt because of low expenditure on infrastructure. Many of the western countries have more than 80% Debt-GDP ratio and the U.S. currently has a rate of 102% which is well above a general acceptable ratio of 50%.
Let's talk about the Aussie dollar: Is this a major change in the trend? I don’t think so but analysis of the weekly trend chart suggests the Aussie dollar will drop further to 90, but 94 (from current 0.99) will be the first strong support which can hold for quite a while. The AUD peaked close to $1.10 against the USD, touching this level on a few occasions in 2011 and 2012. I expect this peak level of 1.10 will be challenged again down the road and eventually break to the upside - not so soon though... Meanwhile, I expect a very broad trading range between 94-1.04 in 2013 and 2014. Against USD, 94 level must hold otherwise it will break down to 90 which I think is the long trend line support. Look at the chart below comparing the AUD against USD over the last 100 years; you will understand why the AUD is able to sustain above its long term trend line support of 90. But never say it will never break down. It all boils down to the market sentiments and future policy issues down the track. That is why analysis needs constant monitoring and reviewing to time the cycle top and bottom.
The USD is the the king today and for the next 2 years at least. Is U.S economy in a better shape than Europe and Japan? May be Yes (temporary in term of confidence factor) but as the saying goes ‘in the kingdom of the blinds, the one-eyed man is the king. But eventually the USD( become blind too) will lose its steam and value again due to sovereign debt crisis.
All this up and down movement is basically due to a ‘confidence factor’ and the flow of capitals from one nation to another nation. And cyclical timing analysis can surely determine the turning point with uncanny accuracy if sufficient data can be collected and analysed.
For those who want to more know about the turning point in all these markets, I suggest that you become my subscriber (you pay only 20 cents per day) so that you get regular updates on the cycle top and bottom (entry and exit) with my fundamental, technical and cycle timing analysis. I offer genuine/reliable information and I speak against the MSM and all the economic lies. I promote through referrals only. You need to fully understand that ‘there is a time to buy and a time to sell’. Nothing goes up and down vertically. In between, you need to time the correction and consolidation phases. You do not want to get in too early nor do you want to exit too early too. And most importantly, you do not want to get crushed in the panic cycle.