THE BIG PICTURE: Why the Australian dollar says we’re middle of the road
Sunday, July 1, 2012/
In Australia, we are interested in tracking the performance of financial markets over the financial year – the 12 months to June. However, in most other parts of the globe, the focus is more on the end of the month, end of the quarter and completion of the first half of 2012.
So, concentrating on the latter – the last six months – how have currencies fared over 2012? Well, CommSec tracks 118 global currencies and the best description for the period is “mixed.” When viewed against the US dollar, 32 currencies were stronger, 23 were stable and 63 were weaker.
Overall the results suggest that the US dollar was generally stronger, but a simple average of the changes reveals that the greenback has risen by just 2%.
The Australian dollar is close to the average performance – down 1.5% against the US dollar and ranking 75th of 118 currencies. The UK pound is up 0.6% against the US dollar while the Euro has fallen by 3.5% and the Japanese yen has lost 3.2%. The strongest currencies have been from Belize, Colombia and Hungary while the weakest were from Malawi, Syria and Sri Lanka.
In terms of sharemarkets, CommSec tracks 72 major world stock indices and interestingly 36 have actually gained so far in 2012. The top performing markets are Venezuela, Egypt, Pakistan and Vietnam, while the weakest have been Cyprus, Ukraine, Spain and Sri Lanka. Asia and Latin America dominate the list of outperformers while indebted western European nations dominate the underperformers.
The Australian sharemarket is broadly in the middle of the pack with the All Ordinaries down 0.7% and in 46th spot of the 72 bourses. The German Dax is currently up 5.6% over the first half of 2012 with the Japanese Nikkei up 3.3% while the UK FTSE is down by 0.9%.
In the US, the Dow Jones is up by 3.4% but the real star performer has been the Nasdaq with its technology stocks – up by 10.4% over the first half of 2012.
The week ahead
A new month and quarter begin and hopefully there is more optimism about the global economy. There are a number of “top shelf” indicators to be released in Australia over the coming week.
Meanwhile the ISM manufacturing and services gauges and employment figures dominate in a holiday-shortened week in the US.
In Australia, the week kicks off on Monday with the Performance of Manufacturing index, monthly inflation gauge and RP Data-Rismark Home Value index. The Performance of Manufacturing index hit an eight-month low in May, but interest rate cuts and a weaker currency could be the catalysts to engineer an improvement in June.
However, a sustainable recovery will require stronger consumer spending and lift in the global economy.
Also on Monday is the release of the monthly inflation gauge from TD Securities and the Melbourne Institute. The May reading showed annual inflation at the lowest levels in two-and-a-half years. If inflationary pressures remain restrained in coming months it will leave the door open for another interest rate cut.
The monthly RP Data-Rismark Home Value index is also released on Monday. The good news is that the daily price index has been tracking higher over the last month and the five capital city series is now down 4% on a year ago after falling by 5.5% in the year to May. Home prices appear to have bottomed but the improvement across the capital cities in coming months will be far from uniform.
On Tuesday, the Reserve Bank Board holds its monthly interest rate setting meeting. And after cutting rates for two months in a row, we expect the central bank to stay on the sidelines in July. The Reserve Bank did seem to be a reluctant rate cutter in June, and with inflation data to be released later in July, there are good reasons to wait before deciding the next move.
Also on Tuesday, the Australian Bureau of Statistics (ABS) will release the May building approvals data: To say that these figures are volatile borders on understatement. In April, new approvals fell by 8.7% and we tip a 10% rebound in May. Australia is probably underbuilding at present, but budding home buyers are content to share accommodation with friends and family at present, so there is no pressing rush to build more homes.
On Wednesday, the ABS releases the May retail trade series. It is now commonly acknowledged that this data is failing to pick up consumer spending trends as well as it has done in the past. The major problem is that it is failing to pick up the services sector. But the data is still useful as a guide to spending behaviour. We expect that retail trade rebounded by 0.6% in May after falling by 0.2% in April.
And on Thursday, the May trade data is released. After recording a $203 million trade deficit in April we expect the accounts moved back into the black by $300 million in May.
In the US, the week kicks off with the release of the June ISM manufacturing gauge on Monday together with construction spending figures for May. The ISM index remains above 50, indicating growth of the manufacturing sector. The same can’t be said for the Australian equivalent. But analysts tip the US gauge to ease from 53.5 to 52.6 in June. Construction spending is expected to have inched 0.2% ahead in May.
On Tuesday, data on vehicle sales and factory orders are released together with the ISM New York business index. While factory orders are expected to have eased by 0.2%, vehicle sales in June are tipped to lift by 1.3% to 13.9 million units.
On Thursday, the ISM services gauge will be released alongside the ADP national employment gauge and Challenger job layoff series. The ISM gauge is only expected to ease modestly from 53.7 to 53.0 and the ADP index should show 104,000 private sector jobs were created in June.
But, as always, the highlight of the coming week is the release of the non-farm payrolls or employment data on Friday. The past few months have been disappointing with European debt woes white-anting the US economic recovery. But the hope is that 90,000 jobs were created in June – an improvement on the 69,000 increase in May.
The jobless rate is expected to have held steady at 8.2%.
In China the official manufacturing gauge is released on Sunday with HSBC services index on Wednesday.
Sharemarket, interest rates, currencies and commodities
Australia has the highest short-term interest rates in the developed world. Each week The Economist magazine tracks interest rates in 57 countries and in the latest edition the data showed Australia with the 19th highest rates in the globe. The highest three-month rates can be found in Venezuela at 14.5% while Switzerland has the lowest at just 0.10%.
Australia fares a little better when it comes to 10-year government bond yields. Of the 46 countries with data available, Australian bond yields are the 28th highest in the world – broadly middle of the pack.
Since the start of 2012 the Australian dollar has eased by 1.5% against the greenback but the CRB futures commodity index has fallen by 11.3%. The Aussie is being supported by foreign buying of our government bonds while weak global economic growth is dragging metal and energy prices lower. If the gap remains or widens further, the Reserve Bank will be more inclined to cut interest rates.
Craig James is the chief economist at CommSec.