[ZenGum]

Sorry I went quiet there, after stirring things up like that. I was moving house. Graphs do catch the imagination, don't they?

So, Australia's economy. There are two main reasons why the AU$ has fallen so steeply, especially against the yen.


Reason number one is an indirect link with the USA's problems.

We are NOT very badly exposed to the bad mortgage market in the US. Most of our banks have written off a billion or so, but nothing they can't handle. The "Big Four" banks are cashed up and looking to buy other banks.

However, we are indirectly feeling the pinch of the current problems.

The main export earner for Australia is commodities, especially minerals. However, we sell most of those resources to China (etc), where the Chinese manufacture them into consumer goods and sell them to the USA. Now that demand in the USA has gone frigid, China is slowing, and that means both lower volumes of sales for us, and lower prices, thus significantly lower total earnings. This of course means less demand for AU$, and so the price falls.
So, one factor in the steep decline of the AU$ definitely IS the US problems, only indirectly.

The second factor driving the fall of the AU$ is interest rates. Note that the AU$ has fallen much more against the Yen than any other currency. This is because of the unwinding of the "carry trade".

The carry trade is made possible by different interest rates in different countries. The Japanese central bank, in an attempt to stimulate their economy, has kept interest rates at either 0 (yes, ZERO) or 0.5% for more than a decade. Many people realised they could borrow money in Japan, and invest it in a bank overseas where it would earn a nice interest rate, and rake in the interest. Until a year ago, you could get 7.5% or more capital guaranteed in Australia. New Zealand was offering a few points more.

(Digression: this shows the folly of extreme interest rates - in this case, they caused money to flood out of Japan, thus sedating, not stimulating, the economy. The same works the other way: high interest rates can suck in capital from overseas, thus stimulating, not slowing, an economy. It only works if the difference with other markets is small enough that the risk of currency fluctuations (see below) is enough to deter carry trading. End digression.)

The risk with the carry trade is if the currency exchange rate changes - if the Yen goes up, the Japanese carry-traders might not have enough foreign denominated holdings to pay back their initial loan in Yen. They can get burned pretty badly.

As a result, carry-traders are skittish and prone to panic. If the Yen starts to rise, it sometimes spikes dramatically, as carry-traders try to rush their money back and minimise their losses. This of course is an extra spike in demand which just drives the Yen even higher.

That is what has happened recently. The end of the resources boom caused the Australian dollar to fall moderately. More of a slide than a fall. But as it slid, it crossed some thresholds that caused *some* carry-traders to panic and get out, which started a feedback loop and led to something more like a stampede, and the result was a big, swift rise in the Yen.

I am less sure but I think there is a third factor: with the Japanese stock market sliding, some heavily leveraged Japanese investors got margin calls from their brokers and had to shift capital back to Japan to cover themselves. This has been little discussed in the sources I read.

I will say that I have been expecting this for well over a year, maybe two. It has been widely discussed by economics writers in both Australian and Japanese media. But even so, I have been stunned by the size and speed of the recent shifts.

And yes, as Ali said, we did have a real estate bubble, driven by three factors: the mining boom, the gradual running out of land close to our urban centres, and the too-low interest rates of a few years back.

We have had variable mortages (ARMs) for ages, and as always, some people lock into a 30 year loan they can only afford while rates remain low. Then rates go up, as they do. And the people suffer. So it goes.




Now if you will excuse me, I want to go and cuddle that big pile of Yen I brought back from Japan.

[Burns] Eeexxxcellent!!!!!! [/Burns]