FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.

posted on 24 September 2015

All Eyes On The Aussie Dollar As Australia Stalks Recession

from The Conversation

-- this post authored by Lee Smales, Curtin University

By not moving interest rates last week, the US Fed has simply added to uncertainty within financial markets. Speaking in front of the House of Representatives Standing Committee on Economics, Reserve Bank Governor Glenn Stevens suggested it is only a matter of time before the Fed raises rates. Futures markets are pricing in a 55% chance of a move at the December meeting. In the meantime, uncertainty is already driving more volatility in financial markets, including Australia's S&P/ASX 200 which slid more than 2% on Monday.

In the statement that accompanied its decision, the Fed cited continued improvement in the labour market, an improving housing sector, and continued expansion in domestic economic activity. However, a lack of inflationary pressures, together with concerns about the global outlook, seem to have proved decisive in the Fed staying its hand.

The result was largely expected by financial markets, with just a 25% chance of a 0.25 percent rate hike priced into Fed Funds futures prior to the meeting (although the majority of economists, including myself, favoured a rate rise).

However, after first rallying by 1.4%, the stock market gains evaporated as Janet Yellen (the Fed Chair) spoke about contagion from emerging markets affecting the US economy. The S&P500 Index actually closed lower on the day. The losses in the US dollar were also pared back. Several reports suggest traders are concerned that the Fed has greater concerns about the situation in China, and the global economy, than have been revealed so far.

Australian investors to remain cautious

Moving forward, it is likely that investor focus will shift back to the evolving situation in China. In addition to the Fed apparently focusing on developments there, there is a direct impact on Australia's economy. With China being Australia's largest trade partner by some margin, any further slowdown in China is going to have a negative impact on Australian economic growth.

Over the past 18 months, the Australian economy has started to transition away from the investment-led mining boom of the past decade or so. A decline in the Australian dollar (a 14% depreciation on a trade-weighted basis) has aided this transition. As well as increasing the competitiveness of Australian exports, service industries such as education (Australia's 3rd biggest export) and tourism have benefited. It is perhaps a little unfortunate that there is little of the manufacturing sector left to benefit from this. In addition, the declining value of the dollar has offset some of the steep price decline in commodity prices (which are usually priced in US dollars).

The RBA has pinned its hopes on the the declining dollar, coupled with housing construction fuelled by the east coast property boom, offsetting the investment cliff created by the wind down in mining and energy (e.g. LNG) related construction. Business and consumer confidence appears to have received a boost following the replacement of the (in my view) inept Abbott government, and this may help in the short term.


But there are early signs that property prices are starting to cool. As the economies of major trading partners are slowing, the resulting fall in commodity prices has pushed many of the newly completed (or soon to be compeleted) projects into the red. It may take a magic wand from the RBA (or the new Turnbull government) for Australia to escape a recession. Already, Australian (per capita) living standards are stagnating, so for many this may feel like a recession, even if the technical definition of recession (two consecutive quarters of declining GDP) is not met.

With this in mind, the effect of Fed action on the Australian dollar may be of more importance. The last thing the RBA will want is for the dollar to start appreciating on the back of a declining US currency.

Until the situation in China is resolved somewhat (which may take many months), Australian investors have every right to be cautious. With uncertainty likely to continue, accompanied by higher volatility levels, risky assets (such as stocks) will be in less demand. Investors may not have witnessed the end of the recent slide in stock markets.

The ConversationLee Smales, Senior Lecturer, Finance, Curtin University

This article was originally published on The Conversation. Read the original article.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical News Post Listing

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

You can also comment using Facebook directly using he comment block below.

Econintersect Contributors


Print this page or create a PDF file of this page
Print Friendly and PDF

The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.

Take a look at what is going on inside of
Main Home
Analysis Blog
The Surprising Pevalence of Surprises in Export Specialisation
The Destruction of the Existing Workforce
News Blog
Early Headlines: Asia Stocks Mixed, Dollar Down, Oil Up, China May Replace US In TPP, Trump Freezes Feds' Hiring, Trump Files 'Secret' Transfer Papers, May To Visit China And More
January 23, 2017 Weather and Climate Report - NOAA Continues ENSO Neutral Denial
Documentary Of The Week: China's Wealth, Collapse, And Environmental Nightmare
Where Trump Stands On Twitter
Is This Really The Final Word On Whether Calorie-restricted Diets Make You Live Longer?
Electric Mobility Has A Long Way To Go
Average Gasoline Prices for Week Ending 23 January 2017 Fell Over 3 cents
What We Read Today 23 January 2017
Badass Grandpa Tokyo Drift!
Hurricane Matthew Clocks Top Wind Speed For 2016 At 101 MPH
Consumer Debt Growth May Have Stalled In Q3
Measuring Americans' Expectations Following The 2016 Election
Infographic Of The Day: Seven Negotiation Techniques
Investing Blog
Netflix And Co. Surpass DVD And Blu-ray Sales
The Future Of Online Sales
Opinion Blog
Bill Maher 2017 Season Premier
Trumping World Trade
Precious Metals Blog
A Slow Start For The Week Would Be Constructive For Gold
Live Markets
23Jan2017 Market Close: Wall Street Down, But Pares Morning Losses By The Closing Bell, Crude Rises Back To Normalcy And The US Dollar Nears Slipping Below 100
Amazon Books & More

.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Middle East / Africa
USA Government



Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved