Why the Land Down Under is Actually On Top

Joined : 23 Dec 2007 Posts : 235 Location : Nigeria

Today's commentary is by Sean Hyman, our Currency Director and editor of The Money Trader.

Good Day Currency Traders!

Sunday night, Australian Central Bankers announced they may soon hike their interest rates again to “cool the uncomfortably high inflation.''

''Absent a further shift in economic risks to the downside, monetary policy is likely to need to be tighter in the period ahead,'' the Reserve Bank of Australia said in its quarterly policy statement in Sydney.

Australia is the only country left in the world that’s in “rate hike” mode. This puts the Aussies in a special light as the rest of the global economies are cutting interest rates (or about to).

Aussie’s Domestic and International Demand Keeps the Aussie Dollar Up
The Aussie inflation continues to shoot far above the Aussie Central Banker’s “comfort zone.” Domestic demand remains strong. Here’s what Australia’s central banker had to say about it:

“Consumer demand has been driven by rapid growth in household incomes, which in turn has reflected rising employment and real wages as well as cuts in income taxes.”

Then there’s international demand…China is still buying up resources from Australia like a “mad man.” This is causing their labor market to remain tight and wages are on the rise. Sectors from mining to retailing are still hiring workers. This is in stark contrast to most of the industrialized world right now.

Australia is the world’s second largest gold miner. Right now gold is hovering around US$925 an ounce. That’s still close to its recent all-time highs. So they’re pulling gold out of the ground at a fixed cost, but they can sell it for prices that continually go up.

South Africa’s Loss is Australia’s Gain
Wait, it gets better. What about the number one gold miner? South Africa can’t even seem to keep the lights on lately. They’re losing power or shutting off power quite often. With no electricity and lights, how are you supposed to mine gold? That’s the problem South Africans are currently having.

But South Africa’s “pain” is Australia’s “gain.” Those who would normally get their gold from South Africa may now turn to Australia as a more dependable source.

All this will only aid the Aussie dollar in the coming weeks. Even during global market turmoil, I see the Aussie dollar thriving on. This puts them in a unique position in the world right now.

So the question is: What should it be paired against for optimal results in trading? In the latest G-7 meeting, Canada announced that it would likely cut interest rates further to aid their economy and the global economy through this sub-prime mess.

Given this information, it sure makes the AUD/CAD pair look enticing for buyers. Check out the chart of AUD/CAD below.

What to Buy When the Aussies Are in “Hike” Mode and Canadians Are in “Cut” Mode

At the same time, the U.S. could lower rates further because the Fed has already lowered rates so aggressively already. If that’s the case, then it would bode well for AUD/USD. After all, right now the “land down under” is the “land on top.”

Since jobs are plentiful in Australia, people are still buying retail goods, housing, etc. Expect that to continue until the labor market finally softens. Australia will probably be one of the last major countries affected by the sub-prime crisis.

Aussie Inflation Strong Until 2010?

If the central banker is right, then Australia’s inflation will rise to 3.75% until June and then will gradually back off to the 2% mark. However, the “kicker” is that he thinks it will take until 2010 until that happens. Wow!

Thankfully, the Australian economy has a lot of “momentum” going for it right now and it would take a lot of “sub-prime drag” to slow this racing chariot.

Making 'Cents' of the Headlines
How the Lack of Electricity Is Sinking a Currency

From Currency Director: Sean Hyman

What's Happening:

Commodities are flying high right now. Commodity exporting countries have been raking it in and loving it. These are countries like Canada, Australia, New Zealand and South Africa.

What I Say:

However, recently one of them has been plagued with power problems. South Africa can’t seem to keep their lights on. Now that would usually be a problem. But in a year when commodities like gold and platinum are hitting all-time highs, it really hurts. If South Africa were a corporation, it should be a stellar year for their earnings. But they dropped the ball ...but not without being forewarned.

Back in 2000, the country’s largest electricity provider (Eskom) warned President Mbeki that it needed to start increasing generation capacity. However, the president ignored their plea.

Well now, eight years later, the problem has finally caught up to their president. He’s apologized to the corporation for not heeding their warnings. But in the meantime, they won’t be able to invest in an electricity grid and increase generation capacity until 2013. Wow! Now that’s just wrong.

There have been times where the gold and platinum mines have been shut down for five days in a row. Ouch! So AngloGold, Africa's biggest gold miner, said last week it will lose 400,000 ounces of production in 2008. The company produced 1.37 million ounces last quarter. Harmony Gold Mining Co., the No. 3 gold producer, lost 300 million rand (US$38 million) of production during the five-day shutdown alone. Talk about a major mistake. Aren’t you glad you’re not that president right about now?

Not only is it hindering these sectors but also others such as aluminum smelters and retailers. South Africa’s biggest shopping center saw an 80% drop in business during the power outage. And they’re selling high-end jewelry, Mont Blanc pens, designer handbags, etc. So it was a major hit to them. This wasn’t a “dollar store” that had to shut down by any means.

All of this is a huge hit to the South African economy. For instance, precious metals and minerals account for 60% of their exports. It contributes to 10% of the world’s gold and 80% of the world’s platinum.

So this has now become the world’s problem hasn’t it?So what have all of the power problems done to the South African rand? It has caused it to plummet even against the U.S. dollar. The buck is gaining some serious ground on it lately. Check out the chart below of the USD/ZAR.

The Buck Thrashes the South African Rand

The rand is down 12% this year against the dollar. And option prices show it has the worst prospects of any currency right now.

So if you want to see what people think of a country, take a look at the price of their currency. A currency is collectively the “voting machine” of what people think of an overall economy because they consider growth, political stability, inflation, etc.

The fall of the rand probably isn’t over either. The buck just broke the down trending “strangle hold” that the rand had on it…expect more dollar strength against the rand in the coming weeks ahead.

It’s a sad story for South Africa because now is the time where they should be shining…and instead, they’re sputtering. This president has sealed his fate. However, the prospect for the next president doesn’t look any better. (That’s another reason why the rand is falling off of a cliff. He’s been accused of rape, fraud, money laundering, racketeering and tax evasion.)

That’s obviously not going to add to the rand’s stability anytime soon. So when you couple all of this with the growth rate dropping from 4.7% last year to possibly 3.7% this year, things aren’t looking so hot for the rand right now.

That’s why even the beaten down buck has been annihilating the rand lately. Those that are buyers of USD/ZAR are loving life these days.