Missed the previous link. Will read now.

A recession and inflation unfortunately go hand in hand, as governments desperate to keep the ship afloat will print money if necessary. Of course this devalues everyone's dollar/pound, hence the hideous inflation in the Great Depression. Aus having cash surplus and not a deficit, unlike US, UK etc can uphold things longer without desperate measures. (Unless it's all invested in sub-prime of course)

It’s a long one…

Once upon a time there was a country that was considered the breadbasket of the world. They supplied wheat, barley, iron ore, coal, metals, uranium and other commodities to an ever-expanding global marketplace which boosted their own economy, provided good net terms of trade (money made from exports – money paid out in imports), stoked rising asset, share and house prices and generally a sense of well-being that people fed back into the housing market and credit at a massive rate, rather than saving their money.

Over time the demand for these goods rose as basically demand>supply and people could only see the trend going one way. Investors flocked to this economy as it was offering a great return on investment, stability of government, an advantageous yield - and this became a self-perpetuating theme as the investment community looked at the global picture and saw they could borrow money at very low rates overseas, switch that money into the local currency and invest it in this booming economy for greater ‘carry’ as yields were way higher. As a result the value of their money grew as everybody wanted some of the action.

As these prices showed no sign of abating, there were concerns about inflation, which everybody had regarded as a non-issue for a while. But all was ok – central banks raised rates to ‘defeat’ this problem and thought all was rosy. Then one day everybody woke up to the realisation that a lot of people overseas who had borrowed money at great rates to buy property were having problems paying that money back – house prices there began to fall, a french bank with hedge funds invested in the housing market announced they couldn’t afford to pay their investors...and the credit crisis became part of common parlance…

…and we switch to today - global sentiment has plummeted, international expansionary forecasts and plans have been cut or postponed. Credit is much harder to obtain. The best cure for high prices (oil, commodities etc) has proven to be…high prices…this has forced a change in investment patterns and usage.

The huge drivers of global growth in the west are slowing – and only really worried about themselves. They are reining in a lot of excess spending – partly because they feel scared for the future, partly because it’s so much more expensive to borrow money than it was before and partly because the lag effect of those high prices from before have hit their bills and wallets for long enough for them to notice. The huge drivers of global growth in asia produce most of the goods the west consumes, and even more importantly lend them the money to be able to buy the goods in the first place, so as western consumption slows down, they are closing a lot of factories and finding it more difficult to borrow money to invest in their own future, and worrying about if they’ll get all their money back. They are also awakening to the realisation that you cannot, for example, drop the water-table in your Olympic city by 80m, build housing at the rate of three sydney’s a year in perpetuity without suffering demographic, food problems in the longer run – and as result even their domestic investment and infrastructure plans are slowing.

So, back to our breadbasket economy. Those countries which were buying their bread don’t need as much and even the goods they do need are harder to buy because banks won’t lend them the money to do so. There are global whispers of recession and a lot of scaremongering, because it has become a ‘crisis of confidence’ we hear. So all that money that was parked in the country to benefit from the carry trade is being taken out and hoarded in lower-yielding but ‘safer’ assets classes such as overseas government bonds. So the economy begins to slow and the money in this economy isn’t as valued as it was.

So what do you do as an economy when credit starts to dry up, the economy slows and you’ve left rates far too high by focusing on inflationary risks? You cut rates - hard. This gives you a temporary boost as mortgage and other borrowing rates are lower, yet there’s still a problem. This time commodity supply>excess and investors globally are becoming more and more risk averse. And those economies buying your goods would rather cut down on use, find alternatives and/or use up their own supplies they’ve been hoarding first before they come to you. So the price contracts you’re going to negotiate next time round will be far lower than they were before. These goods are generally priced in overseas currencies so at least that fall in the value of your money means that when they do buy some it means more in local currency terms – which is good right?

But what about importers? Well, they’re considered less important here in the bread basket, relative to the exporters. As the exporters export less, rates are cut and the currency falls, does this actually has a net positive effect on the average family? I mean their mortgage repayment’s lower isn’t it? Well, the problem now is that for the average family, the goods they want to buy in the shops could still be more expensive. Although global prices of many goods are lower, the local currency and purchasing power is weaker. Add to that the loss of money on investments, superannuation through the ‘crisis of confidence’ and consumers start to worry about their own future. Where has most of the good-time money been parked? In houses and credit – not in savings accounts accruing interest. So approvals of new houses and general prices in some areas start to wane, as now is not the time to risk a loss. On top of this, general confidence data falls, retails sales fall and unemployment begins to rise because that same sentiment in the western economic powerhouses (worries for the future, higher relative borrowing costs, lag effects of those high prices) are hitting home.

But what about those terms of trade – doesn’t that cushion things for a while? Well, no not really. Although it’s a great number taken in isolation, this breadbasket economy has still accrued a huge current account deficit and household debt is enormous – and that has been in the good times. In addition, the amount of money this economy now has to pay all those overseas investors who lent them money in those good times by buying their assets is actually twice the amount (as a percentage of GDP), when compared to that overseas economy where house prices have fallen so heavily. So could things actually be worse here than overseas?

So what to do and what about the currency – where is that likely to go? Well, that comes down to your perception of the global economic picture? It’s all a balancing act as to which countries will be hardest hit and what the knock-on effect will be in the economic food-chain, but I don’t think talk about strength of domestic banks is the issue here at all. Ultimately it comes down to the breadbasket issue. How much bread will be sold, who will buy it, at what price and which loaves (the tastier but more expensive. or the cheaper but quickly filling stuff).

Personally, I think the aussie is going to be hammered as a cross rate. As someone else said there’s more room to move rates here, although they could be creating big inflation problem for the future. In answer to your question of whether a lower currency is a good or bad thing? I think you need to look at the rate as a price that responds to global events – so it will always depend on whether any market participant is a buyer or a seller, so isn’t a general good/bad issue as such. It’s all about supply & demand really. Right now, the roles have switched and the buyers have the upper hand in term of exports – in the same way buyers have the upper hand in the uk house market. I don’t know how it will pan out but I’m not very optimistic, although maybe it’s time we all learnt a harsh lesson about credit? But in the meantime, a falling aussie doesn’t necessarily mean the aussie economy itself will be ‘hammered’. It has seen the benefits of several years of record commodity prices so a downturn is only a downturn - for now…

But saying all that that I don’t have a crystal ball and bought some at 2.62 if only because I waited patiently for the 2.60 level and it was a lot better than 2.02…

Right now it's 2.5569 dollars for the pound. A good rate for buyers.

Does anyone have an opinion on how much longer this favourable exchange rate will last?
For those of us not yet ready to exchnage, it is frustrating to see such good rates, and not be able to take advantage of them.....

Any opinions?

Nix

you are able to take advantage if you wish by either buying now (forward) or setting your rate at say 2.60 AUS $ (both with a 10% deposit). With forward buying you are able to set this rate for up to 2 years (I think).

One of the companies is HiFx and I think the later requires an Oz bank a/c which can be set up from the UK - they have an agreement with Westpac although you can use any Oz bank a/c.

Hope this helps

Gold up 15% in a day

Commodities is only a small part of the strength of the aussie recently. Its the high yielding interest rate at 7% taht has made the aussie attractive. Now its 6% and speculators are selll sell sell.

Certianly does!

Thanks!