AUD Gains After Rate Cut

Published on Bloomberg: Australia’s Dollar Strengthens After Rate Cut, Stimulus Plan

• Feb. 3 (Bloomberg) -- The Australian dollar gained after the central bank cut interest rates to the lowest since 1964 and the government announced a stimulus package to avoid a recession. New Zealand’s currency rose from near a six-year low.
  
  The Australian dollar ended three days of losses as the government said it will spend A$42 billion ($26.7 billion) on grants and infrastructure to counter the impact of the global financial crisis. The Reserve Bank of Australia lowered its benchmark rate 1 percentage point to 3.25 percent, two hours after the stimulus package was announced.
  
  The combination of fiscal and monetary stimulus “is going to be a positive for the currency,” said David Forrester, a currency economist at Barclays Capital in Singapore. “I wouldn’t be surprised to get above 64 U.S. cents against the dollar but meet resistance there.”
  
  Australia’s currency climbed to 63.92 U.S. cents as of 3:11 p.m. in Sydney from 62.72 cents late in Asia yesterday. The currency advanced 2.7 percent to 57.29 yen after falling 3 percent yesterday. It may advance towards 60 yen, Forrester said.
  
  New Zealand’s dollar gained to 50.73 U.S. cents from 49.92 cents yesterday. It earlier touched 49.62 U.S. cents, the weakest level since November 2002. It rose to 45.43 yen from 44.40 yen yesterday.
  
  Australia’s stimulus package includes A$12.7 billion in grants to families and low-income earners and A$28.8 billion for infrastructure. It will help send the nation’s budget into a A$22.5 billion deficit, the first shortfall since fiscal 2001-02.
  
  Avoiding Recession
  
  The economy would contract in 2009-10 without today’s stimulus, current Treasury forecasts show. The stimulus package will help the economy grow 1 percent this fiscal year and 0.75 in the year ending June 30, 2010, according to the Treasury.
  
  “The Australian dollar can rally a bit further up to 64 to 66 U.S. cents,” said Greg Gibbs, director of foreign-exchange strategy at ABN Amro Australia Ltd. in Sydney said after the stimulus was announced. “From there the realities of a slowing global economy and worsening terms of trade will remain important factors driving the currency lower again.”
  
  Australia’s trade surplus narrowed in December by more than forecast as coal and metal exports declined, a government report showed today. The surplus shrank in December to A$589 million from a revised A$979 million in November.
  
  Australia’s currency tumbled 31 percent over the past six months as the central bank has lowered its benchmark from a 12- year high of 7.25 percent since September.
  
  Carry Trades
  
  Higher interest rates in Australia and New Zealand, compared with 0.1 percent in Japan and as low as zero percent in the U.S., attract investors to the South Pacific nations’ higher-yielding assets. New Zealand’s central bank cut its benchmark 1.5 percentage points to 3.5 percent on Jan. 29.
  
  The currencies also advanced against the yen after the Bank of Japan said it will resume a program of buying shares held by financial institutions, raising speculation investors will buy assets offering higher returns. The bank will purchase 1 trillion yen ($11.1 billion) in equities through April 2010 and hold them until March 2012 at the earliest, it said after its policy board met in Tokyo today.
  
  New Zealand’s dollar earlier traded near an eight-year low versus the yen after an industry survey showed consumer confidence sank to the least in a decade. Seventy-two percent of 750 people surveyed in late January expect the economy to worsen this year, up from 56 percent in December, UMR Research said.
  
  New Zealand’s economy will remain in recession until at least March 31, the Treasury Department said yesterday.
  
  Australian government bonds declined, pushing the yield on the 10-year note up seven basis points, or 0.07 percentage point, to 4.17 percent, according to data compiled by Bloomberg. The price of the 5.25 percent security due March 2019 fell 0.631, or A$6.31 per A$1,000 face amount, to 108.826.
  
  New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, rose to 3.32 percent.
  

Aussie Budget Hurting From Global Crisis

Published on Business Times:

• SYDNEY: The global economic crisis and China's slowdown will punch a A$115 billion (A$1 = RM2.32) hole in Australia's budget over the next four years, Prime Minister Kevin Rudd said yesterday.
  
  But despite the budget being plunged into deficit, Rudd flagged more government spending in a new stimulus package, pledging "to move heaven and earth" to support growth in the economy.
  
  "The truth is that the global recession in general and the collapse in China's growth in particular, has produced a US$115 billion (US$1 = RM3.61) fall in Australian tax receipts to the government," he told reporters in Canberra.
  
  "That figure equals about half the government's total tax receipts in a given year, although of course that figure ... is spread across the forward estimates (covering four years)."
  
  Last May the budget had been forecast to be A$21.7 billion in surplus. But the gravity of the global crisis provided the country with a stark choice of either acting to boost the economy or "allowing the jobless queue to grow even longer", he said.
  
  "This government will intervene," he said, dismissing opposition objections to more spending. "We will do so decisively with further action to support jobs and growth."
  
  The government, which pumped A$10.4 billion into the economy in December to boost consumer spending, will announce a second stimulus package in the new parliamentary session beginning today, he said.
  
  The projected tax receipt loss of US$115 billion is US$75 billion higher than the shortfall estimated in the government's mid-year outlook three months ago.
  
  The further drop includes US$50 billion in company tax receipts, 13 billion in income tax, 10 billion in sales tax and two billion in other assorted taxes.
  
  Globally, six of Australia's top 10 trading partners are in recession and the halving of China's growth alone would result in a US$15 billion loss to Australia's economy in 2009/2010, Rudd said.
  
  Demand in China and other Asian countries for Australian resources such as coal and iron ore had underpinned an economic boom for a decade, allowing a long series of budget surpluses. - AFP

Source: http://www.btimes.com.my/Current_News/BTIMES/articles/abudget/Article/

pst: Would you invest in the AUD? Would you?

Aussie Cuts Rates Big Time Again - The Global World Cut Is On!!

On CNBC news: http://www.cnbc.com/id/28006771

On Bloomberg: Australia Extends Biggest Rate-Cut Round Since 1991

• Dec. 2 (Bloomberg) -- Australia’s central bank cut its benchmark interest rate by one percentage point, extending the biggest round of reductions since the nation was last in a recession in 1991.
  
  Governor Glenn Stevens lowered the overnight cash rate target to a six-year low of 4.25 percent in Melbourne today, the fourth reduction in as many months. Four of 21 economists surveyed by Bloomberg News forecast today’s move and 15 tipped a three-quarter point cut.
  
  Stevens said monetary policy is now “expansionary” to help restore consumer and business confidence, which has been battered by this year’s 44 percent slump in the benchmark stock index and the biggest drop in house prices since 1978. Three percentage points of cuts since September save borrowers with an average A$250,000 ($159,000) home loan more than A$500 a month.
  
  Today’s decision “is a vital element in the effort to ward off recession in Australia,” said Heather Ridout, chief executive of the Australian Industry Group, which represents the nation’s biggest companies.
  
  The Australian dollar traded at 63.78 U.S. cents at 4:48 p.m. in Sydney from 63.74 cents just before the Reserve Bank of Australia’s announcement. The two-year government bond yield rose 12 basis points, or 0.12 percentage point, to 3.05 percent.
  
  The S&P/ASX 200 stock index slumped 4.2 percent to 3,528.20 today. Banks led the declines.
  
  ‘Cut Warranted’
  
  “Weighing up the international and domestic developments of recent months, the board judged that a further significant reduction in the cash rate was warranted now, to take monetary policy to an expansionary setting,” Stevens said in a statement.
  
  While Australia’s economy has been more resilient than “other advanced economies,” recent evidence indicates that “a significant moderation in demand and activity has been occurring,” he added.
  
  Gross domestic product growth probably slowed in the three months through September to 0.2 percent from the second quarter, when it expanded 0.3 percent, economists forecast. That would cut annual growth to 1.9 percent, the smallest gain since the second quarter of 2002. The GDP report will be released tomorrow.
  
  Stevens and his board also cut the benchmark rate by a quarter point in September, followed by a one percentage point reduction in October and a three-quarter point adjustment last month. Today’s meeting is the last scheduled gathering of policy makers until Feb. 3.
  
  Global Reductions
  
  Central banks around the world are slashing interest rates in response to a global slump in demand. The Reserve Bank of New Zealand will probably cut its benchmark by a record 1.5 percentage points to 5 percent on Dec. 4, according to 10 of 17 economists surveyed by Bloomberg.
  
  The Bank of England and the European Central Bank will also lower borrowing costs this week, according to separate surveys.
  
  The Bank of Japan said today it would adopt temporary measures to help companies obtain cash as a deepening recession makes banks reluctant to lend.
  
  “I hope we don’t slip into negative growth, but you have to accept that it’s possible,” National Australia Bank Ltd. Chairman Michael Chaney said yesterday. “It’s in the interests of everybody for demand to be sustained at a reasonable level.”
  
  Unlike the U.S., Japan, Europe and the U.K., Australia’s economy has so far avoided a recession, boosted by a mining boom that has kept unemployment close to the lowest level in more than three decades. The jobless rate was 4.3 percent in October.
  
  Budget Deficit
  
  To buttress the economy, Prime Minister Kevin Rudd said last week that he may allow the government’s budget to slip into deficit for the first time since 2002.
  
  The government agreed with state leaders on Nov. 29 to spend A$15.1 billion, mainly on health and education, to generate 133,000 jobs. Rudd is also giving A$10.4 billion in cash grants to the elderly, first-home buyers and families.
  
  Rudd’s spending package, this year’s 27 percent drop in the Australian dollar and “significant policy stimulus will be supporting demand over the year ahead,” Stevens said today.
  
  Australia’s three largest banks reduced their variable home-loan rates after today’s central bank announcement.
  
  Commonwealth Bank of Australia, the nation’s biggest provider of mortgages, cut the interest rate for its standard variable mortgages by 1 percentage point to 6.7 percent. National Australia trimmed by the same amount and Westpac Banking Corp. adjusted its rate by 80 basis points.
  
  Property Market
  
  Next year will “see a significant shift in sentiment towards property investments, with many Australians taking advantage of the lower interest rates,” said Warren McCarthy, managing director of real estate company LJ Hooker.
  
  Recent reports show the economy is slowing as consumers and businesses trim spending. Company investment growth cooled in the third quarter, business confidence plunged in October to a record low and consumers were pessimistic in November for a 10th straight month. House prices fell 1.8 percent in the third quarter, the most in 30 years.
  
  “We welcome this substantial rate relief,” Australian Treasurer Wayne Swan told parliament today in Canberra. “This is a vital rate cut, delivered at a time when all our joint efforts are directed toward strengthening the economy.”
  
  The Reserve Bank expects the inflation rate will fall back within its target range of between 2 percent and 3 percent in 2010.

The Global World Cut is ON again!!!

And the winner is the one to cut to ZERO??

Lateline Interview: Dr. Marc Faber Talks About Australia And US.

Transcript of Dr. Marc Faber Interview on Lateline - 13th Oct 2008

• TONY JONES: Joining us now in Singapore is Dr Marc Faber, the editor and publisher of the Gloom, Boom and Doom report.
  
  Thanks for being there.
  
  MARC FABER, EDITOR & PUBLISHER THE GLOOM BOOM & DOOM REPORT: Yes, my pleasure.
  
  TONY JONES: Market rallies in Australia, in Hong Kong and across Europe today on news of this government backing for bank deposits and direct investment in banks in the European case. There's been great relief all round, but could this be a false dawn?
  
  MARC FABER: Well, we don't know how deep the economic crisis will be that will follow obviously this financial crisis. It is also assumed that the worst of the financial crisis is over, but that is just an assumption. It could get much worse, sometime in future. As of last week, world stock markets became oversold. Statistically probably the most oversold condition in the last 50 years or so. So rebound is only natural and the markets have a tendency to bottom out in the October November period and then rallying to the spring of the following year. I'd just like to remind you when the market crashed in 1929 ahead of the Depression between November '29 and the summer of 1930 the market rallied 50 per cent before collapsing again by 85 per cent and before having the greatest depression ever. So we don't know for sure, but I would say I'm very sceptical that the governments, especially Mr Gordon Brown who talks about stability and early warning systems, that he has the ability to actually bail out the system. Since he caused most of the problems to start with, and there was an early warning system always in place, namely the early warning system is that when you have bubbles in housing and in equities and in commodities, that something is very clearly wrong.
  
  TONY JONES: Some of those bubbles are collapsing, but let's look at the bailout package. In Britain, the Government is buying large holdings in some teetering banks, even a majority holding in the Bank of Scotland which is nationalisation, because it will have a controlling interest. These are measures of last resort, the question is, will they work?
  
  MARC FABER: Normally, governments are not very good at running banks or at running any businesses, especially not the British Government, as we know. We just have to look at public transportation. So I'm very sceptical that it will work very well and we also have to analyse the terms at which these banks are being taken over. Basically, the proper way to go about bailing out the banks is to let the shareholders lose everything at the same time, let the bondholders take a very significant cut and then the Government should come in, recapitalise the banks, nurture them to health and resell them. But to essentially bail out the banks and still let the shareholders get away with it is probably the wrong medicine.
  
  TONY JONES: You've said recently of some of the largest European banks, the crucial problem is they become too big to fail, but also too big to be saved. Tell us what you mean?
  
  MARC FABER: Well, I think first of all, in a perfect market you have hundreds and hundreds of competitors and if one competitor fails or goes bankrupt it's not the end of the world, because it's just one of a few hundred. In banking, it has become a business that has become heavily concentrated among a few large players and if one of these large players fails, it goes through the whole food chain of the financial system and like a domino stone that falls down, it hits the next domino stone and so forth and so on. And that is the first problem. The second problem is that in comparison to the GDP of some countries, bank's assets are far larger. And so I think that if these countries bail out the banking system they expose themselves to eventually going bust.
  
  TONY JONES: Yes, you point to the leverage ratio of some of the giant banks like Deutsche Bank and Barclays. Can you explain to us what you mean by pointing to those leverage ratios, and what are the implications of these incredibly high ratios in those two giant banks?
  
  MARC FABER: Let's say we are businessmen and we run our businesses and we have equity of 100 and maybe we borrow 50 and then we have a relatively high cushion in carrying our business, even if we have one year's loss or if business turns down. What the banks and investment banks and companies like Fannie Mae and Freddie Mac have done over the years is they have increasesed leverage, and that has been evident through excessive debt growth in the system everywhere in the world, but in particular in the US and in other Anglo Saxon countries. And the end result was that, say, banks they have equity of one and then sates of anywhere between 20 to 50. In other words, the cushion of safety, which was the equity was very small when compared to assets. So when assets start to go down, the equity is gone almost overnight.
  
  TONY JONES: It is incredible. You've said that Barclays has a lending ratio of 60. The Deutsche Bank has a lending ratio of 50, that's $1 of equity to $50 of assets. Now that seems to be way out of kilter with economic rationalality?
  
  MARC FABER: Well, I think that the problem is how do you manage that kind of a risk? And senior management and the board of directors had no idea. So essentially the banks, what they did is they packaged garbage products and they sold to their clients and thought they were smart because they earnt very big fees. Essentially, they buried themselves and that serves them right.
  
  TONY JONES: Do you think the Europeans are facing a financial crisis in their banking system, potentially worse than the United States?
  
  MARC FABER: Could be in some cases. In some cases the banks are more leveraged and national banks or the GDP of these countries, unlike the US, do not support a bailout. I'd like to point out in the US we have now an additional problem coming out. Commercial real estate, and then rising unemployment, rising default rate and globally, we have the credit default swap that is still a time bomb and the whole derivatives market, that is another time bomb. Then in the US, just in the last few days, the following has happened. Last week the S&P the stock market was down something like 18 per cent. But in the past when the stockmarket was down, Government bonds in the US rallied. But in the last couple of days this hasn't happened. The bond market was also weak. Obviously, if the Government bails out the entire system, the credit of the Government diminishes and in my opinion Treasury bonds in the US should already be rated as junk bonds. I'm sure the US Government will eventually go bankrupt. Maybe not tomorrow, but as far as the eye can see, we will have deficits in the US Government, deficits of more than $1 trillion annually.
  
  TONY JONES: Let me ask you this, Gordon Brown is obviously so concerned that he's now calling for a new Bretton Woods conference. It was, of course, in 1944 and restructured the way in which the economies related to each other financially. Do we need something like that again now? Have we reached the emergency that we had in '44?
  
  MARC FABER: Well, personally I think that Mr Gordon Brown is totally unacceptable as a politician and also as a business leader and as a, or as essentially a Treasury Secretary. And he contributed meaningfully to the current crisis, as did Mr Bernanke and as did Mr Greenspan by turning their eyes away from the development of the CDS market from the CDO market and not supervising financial institutions sufficiently and printing money and leading to this huge debt growth, in particular in Britain in the household sector. So that these clowns are now supposed to bail us out is a total joke. I think what they should have done is having a conference already 10 years ago and discuss why is it that credit growth is so strong and that we have these asset bubbles that develop in various markets at different times? And at that time, they should have tightened monetary policies and not only targeted core inflation, but also targeted debt growth and money supply growth.
  
  TONY JONES: You've actually said there is a housing asset bubble in Australia, and also you pointed to the household debt of ordinary Australians as being a huge future problem.
  
  MARC FABER: For sure.
  
  TONY JONES: Do you think Australia is going to get swept up to the same degree, or are we insulated?
  
  MARC FABER: No, I think probably even worse, because don't overlook the fact the US is in very bad shape, but very simply put ... here, I oversimplify, the US doesn't produce anything, it consumes. So if consumption goes down in the US, Okay, Americans become a bit slimmer, that's very good if the obesity rate drops in America and they consume less electronics, they drive around a little bit less, it's not the end of the world. But the translation mechanism goes then into the producers for America. Notably, China and other Asian countries that then have falling industrial production and diminishing exports to the United States. And, therefore, their demand for raw material goes down and so the Asian economies are like a warrant on the US economy. When the US does well they do particularly well, and when the US does badly they're hit very hard and that then goes through to the resource producers, to OPEC, to Russia, to Australia and these countries in my opinion are actually quite vulnerable, especially given the large foreign debt of Australia.
  
  TONY JONES: We're also already, in fact, hearing that some steel mills in China are cutting demand for iron ore. They're actually calling on smaller miners in Australia to actually postpone delivery of orders. Do you think that will spiral, get worse?
  
  MARC FABER: Yeah, I think so, because if you look at the global synchronised boom 2001 2007 it began in the US and then it led to strong growth in China and as China was growing strongly, the industrial production went up, exports went up and then capital spending went up very substantially. And when capital spending picks up, then obviously the demand for commodities does not only go up because of local consumption and industrial production, but because of the capacity expansion. And when the recession comes the expansion is cut down and that leads to a slump in the demand for commodities. We've seen the Baltic Dry Index collapse, oil prices drop from close to $150 a barrel to around 80. Of course it will hit Australia, and very badly so.
  
  TONY JONES: You've also pointed, and I'd mentioned this before to the asset bubble in housing prices in Australia. Are we, in this country, do you think, due for a major correction?
  
  MARC FABER: Yes, I think so, major correction. Because if you look back at Australia we always had booms and busted and they tended actually to be more pronounced than in the United States. So I think we had a colossal boom in home prices and to some extent, also in commercial real estate in shopping malls and so forth and that will go in reverse. It is very difficult to call the bottom, but I think these things take time and if you look at Japan, we peaked out in 1989 on the Nikkei at 39,000. We're now at 9,000 or so. So it can take a very long time and I think this crisis will be a crisis, a milestone in economic history. The way people used to ask, "Are you born before 1929 or after 1929, or before the World War II, or after World War II?" People will ask in future, "Were you born before 2007, or after 2007?"
  
  TONY JONES: Well Marc Faber, living up to your gloomy reputation there, I'm afraid. We thank you for your reality check, however, and we'll hopefully speak to you again in the short term. Thanks for joining us.

Source: http://www.abc.net.au/lateline/content/2008/s2389900.htm