02/04/2013 - 08:46

Hot European money kills hope of a lower dollar

02/04/2013 - 08:46

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Australia’s dollar ought to be falling, a point underlined today by another weak analysis of manufacturing, but any hope of relief for manufacturing, mining or agriculture has been killed by events in Cyprus and the flood of capital pouring out of Europe into safer places, including Australia.

Australia’s dollar ought to be falling, a point underlined today by another weak analysis of manufacturing, but any hope of dollar relief for manufacturing, mining or agriculture has been killed by events in Cyprus and the flood of capital pouring out of Europe into safer places, including Australia.

Rather than retreating from its current rate of $US1.04 to a more comfortable US90c, or less, there is a developing danger that the dollar could creep higher, perhaps testing the recent record of closer to $US1.10.

The cause of the fresh fears about the dollar rising and doing more damage to all export industries has nothing to do with Australia’s economic outlook (which is not that bright) and everything to do with “frighted” international money looking for a safe haven.

Seemingly unconnected, the poor health of Australian manufacturing and the banking crisis in Cyprus are directly linked by currency values and the dramatic change of European policy to hit bank deposit as well as investors in bank shares and bonds.

Suddenly, the Cyprus bank raid by official European agencies such as the European Central Bank, has alerted every European to the danger of an overnight raid on their savings, just as every Australian with money saved in superannuation is aware of the growing desperation of governments to raise money, in any way they can.

Australians will have to wait until May 14 to discover whether their superannuation savings are to be raided by a government looking down the barrel of a $20 billion deficit, rather than a promised surplus, and discover who is classed as “super-rich” by a government determined to perpetuate a class war.

In Europe, they now know that everyone with money in a bank is a target, even if the official line is that Cyprus is a special case because of its rotten banking system, and close connections to hot Russian cash.

As one commentator, Russell Napier from the investment bank, CLSA, said in a note to clients the risks of being exposed to the Euro region now outweighed the rewards, and that would lead to an exodus of capital from Europe.

“With the long arm of Brussels now seen as so powerful, is it safe for an Italian citizen to have bank deposits in Germany?” Napier asks.

His answer: “It might be, or it might not and as there is neither a nominal or likely real return from holding Euro deposits in Germany then why take the risk.”

Napier, and other close observers of global markets, argue that Cyprus was a game changer because of the way European authorities effectively confiscated a big slice of every well-heeled depositor.

What now?

Well, the answer to that question can be seen in rising value of ultra-safe currencies such as the Swiss franc and the U.S. dollar where interest rates might be zero, or carry onerous costs such as those imposed by Swiss banking authorities, but where your capital is safe – or safer than Europe, which is all that really matters.

If not Switzerland or the U.S. then the money will be shifted to countries viewed as unlikely to raid deposits, even if superannuation is a target, such as Australia where the inflow of “frightened funds” can be measured in the rise of the dollar even as the economic news worsens.

Since the first week of March, when the Australian dollar had dropped to $US1.01, and seemed to be heading below parity, the news from Cyprus has got steadily worse, culminating with the European raid on bank deposits and a rise in the Australian dollar to its current $US1.04.

If it wasn’t for the flow of European savings into safer havens there is no way the Australian currency would be rising with the country’s terms of trade continuing to decline, the government’s budget blowing out, and the country stuck in what seems to be a perpetual election campaign.

Capping off the bad news about the Australian economy is today’s manufacturing analysis from the Australian Industry Group which revealed a 21st month of consecutive decline with a fresh reading of 44.4 points on a scale where anything above 50 equates to expansion and below 50 means contraction.

Blame for the latest slide in manufacturing activity was laid at the feet of the high dollar, rising internal costs, sluggish construction activity and the end of the mining boom.

A fresh cut to official interest rates, which is possible after today’s meeting of the Reserve Bank board, might help but the real damage is the dollar and there’s no sign of that falling as the capital flight from Europe gathers pace.

 

STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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