26 Nov The Rise Of The Greenback

With the End of the USA Quantitative Easing (QE) program we have seen that monies worldwide have flowed back into US denominated assets. This has seen the US currency rise against virtually all other currencies in recent times.

The impact has seen the $AUD fall from around 93 cents back to around the mid 80’s. Its not so much the $AUD falling as the $USD strengthening against all currencies. There has been little movement of the $AUD against the Pound or Euro (in fact the $AUD has gone up a little bit against both these currencies)

The US Economy continues to grow with economic growth rates higher (last quarter upgraded to 3.9% – fastest rate of growth since 2003) than Australia & lower unemployment rates. The US has been adding jobs (non-farm) of on average around 225,000 per month this year. This is the highest level since 1999. It is interesting to note that of these jobs approx. 2/3’s earn < $20 per hour.

This plus other world issues (Europe, Ukraine, Japan) may give the US Federal Reserve some pause before they consider raising their cash rates from their current all time lows. The Head Of The US Federal Reserve Janet Yellen is on public record saying that they would keep US interest rates low for an extended period of time to support the US economy. With the oil price falling recently this also takes some pressure off inflation (and is great for the US consumer, transport companies & US business in general)

Moving forward markets will likely focus on the health of the US consumer in the next couple of months. Keep your eyes on retail sales over the upcoming holiday period, which kicks off on the day after Thanksgiving (Black Friday). A significant proportion of US retail sales are completed between late November & Xmas in department & other stores. There is an old joke however that applies at all times – that you should never get between an American & a Cash Register otherwise you may get run over !!!

Contrasting the US is Japan. Recently it announced an increase to it’s QE program which will run for 10 years to $US 724 billion pa which equates to 15% of annual Japanese GDP by buying Japanese Government Bonds. This is a far greater amount than any other QE program which has been run even the Americans & is a phenomenal amount of $$$. On top of this the Japanese Government Pension Investment Fund, the world’s largest pension fund, holding about $1.1 trillion in assets, has also increased its allocation to stocks. Japanese and overseas stocks will now have a 25% weighting each within the fund, up from 12% each. So this means approx. $250 – 260 bn of new monies will be invested directly into equity markets.

Don’t be surprised that sometime over 2015 that the ECB also enters into QE buying European sovereign government bonds to also boost economic activity through the Euro area. This takes a greater political will as it must get Euro countries to agree, more particularly the Germans. The current thought process is that it will take some form of financial crisis in Europe before the Germans agree to this. Europe is however currently flirting with the concept of deflation (which the Japanese have lived with for years)

So What About The Chinese. The Chinese economy continues to hum along with growth rate of > 7% and the Chinese economy is expected to be > $10 trillion next year. Inflation is low in China & there has been a slowdown in their property market & the Chinese currency has been the only currency to increase relative to the $USD in recent times. The Chinese are unhappy from their perspective what the Japanese have just done as this devalues their currency and makes their exports more attractive compared to Chinas. In response the Chinese have decreased their interest rates as well to add a bit of extra stimulus to their economy & aid their currency.

Locally the Government will release it’s Mid Year Economic Update before Xmas (MYEFO). You can expect to see the Federal Budget Deficit increase once again as revenue is down & savings measures from the Budget have not been implemented (today the GP Co-Payment has been dropped & rumors are that the Paid Parental Scheme will be scaled back or deleted in it’s entirety).

The Australian economy is likely facing a low growth & low inflation environment moving forward & expect that GDP forecasts will be scaled back in MYEFO due to falls in commodity prices. There is even some speculation that the Reserve Bank could as their next move cut interest rates (not increase them). Yesterday in wholesale investment markets 3 Year Australian Government Bonds traded at 2.43% (BELOW the Cash rate of 2.5%), which gives you some current indication where wholesale traders believe that Australian interest rates are headed.

Either way the world continues to be awash with cheap monies which will continue to support investment markets & the theory in due course economies.