Housing, retail, and now commodity weakness have taken a toll on the Australian dollar. The final straw for the “Aussie”, the hardest of “hard currencies” (currencies of commodity producing countries such as Australia and Canada) is rate cuts. They are coming.

Bloomberg reports Aussie Weakens to One-Year Low as RBA Signals Interest-Rate Cut Possible

The Australian dollar dropped to its lowest in a year against the greenback as a policy statement by the central bank suggested that an easing of inflation pressures will pave the way for possible interest-rate cuts.

The so-called Aussie slid for a third day against the yen as traders priced in an 86 percent chance the Reserve Bank of Australia will cut interest rates by half a percentage point to 4.25 percent by November. New Zealand’s dollar held a four-day loss against the U.S. currency, after touching a six-month low, as data showed business confidence fell in the third quarter.

“Taking into account all the recent information, the path for inflation may now be more consistent with the 2-3 percent target in 2012 and 2013,” RBA Governor Glenn Stevens said in a statement accompanying the board’s decision to leave rates unchanged at 4.75 percent. “An improved inflation outlook would increase the scope for monetary policy to provide some support to demand, should that prove necessary.”

“The RBA is opening the door to a rate cut and that should put some downward pressure on the Australian dollar,” said Richard Grace, the Sydney-based chief foreign-exchange strategist and head of international economics at Commonwealth Bank of Australia. “With equity markets continuing to remain very soft, I’d suggest that the Aussie is at risk of falling below 90 cents.”

Economic Bust Hits Australia

Flashback May 13, 2011: Economic Bust in Australia:Near-Record Corporate Bankruptcies, Employment Drops Unexpectedly; Rise in Bad Home Loans;Record Low Property Transactions

Employment Unexpectedly Falls Most Since 2009

Bloomberg reports Australian Employment Unexpectedly Falls Most Since 2009, Currency Weakens

The RBA said in its May 6 quarterly policy statement that “most leading indicators point to further growth in employment over the months ahead, although at a slower pace than in 2010.” It also predicted the jobless rate would fall to 4.25 percent by December 2013.

RBA Calls For Unemployment Rate to Drop

What the hell is it that the RBA sees that I don’t? The property bust is underway and going to accelerate, retailers are going under, and consumers are tapped out.

How exactly does that translate to lower unemployment rate?’

Rise in Bad Home Loans

The Age reports a Rise in CBA bad home loans

Commonwealth Bank’s decision to aggressively grow its mortgage market share at the height of the financial crisis is starting to cause indigestion after it revealed an increase in the number of housing loans starting to turn bad.

Further stress in the housing market could emerge with CBA chief executive Ralph Norris predicting the Reserve Bank could issue as many as two interest rate increases by October.

”We’re obviously expecting the Reserve Bank to increase rates and there’s possibly one or two rises to come in the next six months,” Mr Norris told an investor briefing.

Mr Norris was speaking as CBA confirmed it was on track for a record profit result after it reported third-quarter earnings of $1.7 billion.

Norris Way to Optimistic

I disagree with the CBA chief executive Ralph Norris on nearly every point.

  • I highly doubt the RBA hikes twice more.
  • I expect cuts as the Australian economy slumps into a big recession.
  • I expect delinquencies to rise further.
  • I expect profits at CBA have peaked or will soon do so.

I expected the Australia dollar would sink for the reasons stated: Rising unemployment, recession, a housing bust, and most importantly rate cuts (when everyone else was expecting hikes).

Australia’s unemployment rate rises to 10-month high

Flash Forward: September 8 2011: Australia’s unemployment rate rises to 10-month high

Australia’s unemployment rate rose unexpectedly to a 10-month high in August.

Joblessness jumped to 5.3% from 5.1% in July, according to the country’s statistical bureau.

Some analysts say the figures will persuade the Reserve Bank of Australia (RBA) to hold the key interest rate at its current level.

Note the expectation even in September for more rate hikes. Also note how badly the RBA screwed up its assessment of unemployment.

Australian Dollar Daily Chart

click on chart for sharper image

Reversals Difficult to Time

It is exceptionally difficult to time these reversals.

I thought it was pretty clear in May (actually way before that because of the housing bust and retail weakness), that the next move by the RBA would be to lower rates. However, it was not until September (accompanied by the plunge in commodities and increased tension in Europe) that the market agreed.

Then it was a quick 14.5% drop in the value of the Australian dollar in two months, from 1.10 all the way to .94. That drop wiped out a years’ worth of gains (or more) for anyone in the “hard currency” trade betting on short-term Australia bonds.

“Out of the Blue” Taunt Indicator

One of the signs of a huge reversal is what I call the “out of the blue” taunt indicator.

In early August several people emailed “out of the blue” telling me how horrendous my call was, how the RBA was going to hike, why commodities would not pull back, and that there would be no Australia housing crash.

They nailed the top in the Australian dollar. Congratulations!

Reflections on the “Hard Currency” Play

Those who got in the “hard currency” play in early 2009 or the dip in mid-2010 are still way ahead. However, those who chased the play anytime in 2011 are underwater. Those who chased in mid-2011 are way underwater.

The moral of this story is simple: The much ballyhooed “hard currency” play is not something you plow into and forget about.

“Different Economic Phase” Says Prime Minister

Those looking for further evidence of pending economic demise can find it when charlatans start preaching new paradigms and “it’s different this time”.

Australia’s prime minister Prime Minister Julia Gillard did just that on Tuesday. Please consider Aussie PM says mining boom likely to be sustained

Australia’s mining boom fueled by Chinese demand, which kept the economy out of recession during the global financial crisis, “is likely to be sustained for a very long period,” Prime Minister Julia Gillard said Tuesday.

Gillard told a tax summit at Parliament House that the current boom in exports of iron ore and coal is different from previous cycles in Australian history that inevitably ended in busts.

“We are in a different economic phase and we shouldn’t let the language of ‘boom’ deceive us,” Gillard said.

The idea that exports will keep the Australian economy out of recession is complete silliness. Moreover, it was not commodities that kept the Australian economy humming during the great financial crisis, but an enormous property bubble that has now burst.

Mike “Mish” Shedlock
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