The Bernanke Put Lifts Aussie Dollar to 18-Year High
by Gary Dorsch, Global Money Trends. October 4, 2007
Exercising the Bernanke Put lifted the high-flying Aussie dollar to as high as 89.50 US-cents, this week, its highest in 18-years, and a rise of 16% from the lows of 76.75 US-cents hit on August 16th. The exercise of the Bernanke Put also ignited a strong rally for global commodities, which can benefit Australia's $744 billion economy, now in its sixteenth consecutive year of expansion.
Australia's economy advanced 4.3% in the April-June period from a year earlier, the biggest increase in three years. High levels of investment in the Australian mining industry, with the volume of mineral resources production and exports surging to emerging markets in China and India, is a natural stimulant to economic growth. Melbourne-based BHP Billiton said its customers have an undiminished appetite for copper and other metals, with demand driven by China and India.
Australia's income from commodity exports will climb 4% a record A$144.7 billion ($125.8 billion) this business year, buoyed by strong demand from a booming Chinese market, the Australian Bureau of Agricultural and Resource Economics said on Sept 24th. Mineral and energy exports are forecast to rise by 4% to around A$112 billion in 2007/08, led by Australian iron ore exports increasing by 19.3% to a record A$18.5 billion. Iron ore has become Australia's biggest commodity export in recent years, largely due to demand from China's booming steel industry.
The Reserve Bank of Australia (RBA) is hinting at another quarter-point rate hike to 6.75% in November, to curb inflationary pressure in its booming economy. "Given the macroeconomic situation of the Australian economy thus far, some additional restraint would perhaps not be unwelcome," said RBA chief Glenn Stevens hinted on Sept 18th. "But just how much such restraint will occur as a result of a market tightening in credit conditions is not yet clear," he added.
Much will depend on the Australian consumer price index for the third quarter due out later this month, which could climb above the RBA's 2% to 3% target. Meanwhile, there is speculation that Mr Bernanke will exercise his put option again at its October meeting, widening the Aussie dollar's interest rate advantage over the US$ from +185 basis points today, and up from 125 basis points in July.
Last week, RBA deputy Rich Battellino said there is little sign that the August rate hike to 6.50% had an impact effect on consumer confidence and housing. Indeed, Australia's M3 money supply growth surged to an annualized 18% in August, up from 16.6% in July, indicative of an ultra-easy monetary policy that threatens to stoke inflation in the world's 12th largest economy.
The explosive growth of the Aussie M3 money supply helped fuel a 12% rally in the Sydney gold market from July thru mid-September, but Aussie gold bulls ran into a roadblock on Sept 18th, when RBA chief Stevens hinted strongly at a quarter-point rate hike to 6.75%, perhaps as early as November. Steven's hawkish remarks knocked Aussie 10-year T-bond futures from the 94.10 area to as low as 93.80, lifting yields by 30 basis points to 6.20%.
Yet when the time for action comes in November, Mr Stevens' hawkish rhetoric might evaporate into thin air, if the Aussie dollar is soaring to stratospheric levels against the Japanese yen and US dollar, two of Australia's principal trading partners. But without an RBA rate hike, Aussie M3 might reach 20% growth by year's end, and trigger a bigger sell-off in the Aussie T-bond market, (if the Aussie bond vigilantes have any signs of life left)
© 2007 Gary Dorsch