15/05/2013 - 07:12

Could the US be the next ‘tiger’?

15/05/2013 - 07:12

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The big moves in currency markets over the past week have only a little to do with developments in Australia and a lot to do with the US.

The Aussie dollar’s fall below parity with the US currency is clearly a major development.

It has come after a period of remarkable strength in the local currency, which was last at parity in June 2012, and since then seemed to have settled around US104 cents.

But if you want a broader perspective on currency markets, a much more significant development last week was the US dollar breaching the 100 yen barrier.

That symbolised the resurgence of the US currency, which has also made big gains against the euro, pound, and other freely traded currencies.

As always, there were several factors that contributed to the currency movements.

The latest cut in Australia’s official cash rate was one factor. It meant the $A was slightly less attractive to international investors, who have been lured by relatively high interest rates (compared to other advanced economies) and the safety of its AAA credit rating.

Japanese authorities have been working hard to boost their economy, which has been in the doldrums for more than two decades, and a weaker currency is one of their goals.

But the most important trigger for last week’s moves was better-than-expected data on the US jobless front, which supported a growing view that the US economy is coming into a period of solid recovery.

There have been several drivers of the US economic recovery, despite the unemployment rate remaining around 7.5 per cent.

One that Business News has covered several times is the revolutionary impact of the shale oil and shale gas boom. This has led to a dramatic reduction in energy costs, and resulted in the US becoming a net energy exporter.

It has been projected that in just a few years the US will be producing more oil than Saudi Arabia.

The availability of cheap shale gas has led to a shift away from coal as a power source, delivering significant environmental benefits.

An offset has been the serious adverse impact of shale ‘fraccing’ in some areas of the US, but in net terms the US is clearly a winner from this trend.

Manufacturing has been one of the largest beneficiaries. Low-cost energy has helped established manufacturers be more competitive and even encouraged others to transfer their manufacturing operations back to the US – so-called ‘reshoring’.

I am indebted to Poseidon Nickel chief executive David Singleton for providing more insights into the US economic recovery.

Mr Singleton has been keeping a keen eye on developments in the US, which he suggests will become the next ‘tiger’ economy.

That term has in the past been used to describe the fast-growing Asian economies of Singapore, Taiwan, Hong Kong and South Korea.

Mr Singleton believes the ability of the US to achieve high, sustained growth will be aided by the depth of its capital markets, particularly its debt markets.

He’s not talking about banks lending to blue-chip corporations; rather, it’s the ability of emerging businesses to raise money in what has variously been called the sub-prime, or high-yield, or junk-bond market.

There has been a lot of focus on the big losses in the sub-prime market in the aftermath of the GFC; there has been much less focus on the subsequent recovery of this market, which is lending at record levels to a wide array of businesses.

While the available of capital is a positive for the US, so too is the country’s remarkable record of innovation – just think of companies like Google, Apple, Facebook, LinkedIn.

For admirers of the US, these high-profile examples illustrate a wider cultural trait that allows innovative business and technology ideas to emerge and blossom.

The calibre of US universities is surely a contributor to this outcome. In the 2012 QS World University Rankings, released last month, the US accounted for 13 of the world’s top 20 universities.

With so much focus on Australia’s reliance on China, it would be great news for Australia, indeed the global economy, if the US does become another engine of growth.

 

 

 

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