AUD/NZD: Eggs in Basket Effect

AUD, NZD, Eggs, Basket, Effect, RBA, Reserve Bank of Australia, Fundamental Analysis, fx trader, forex

11 May 2016

On 2 May, the Reserve Bank of Australia announced that it would reduce its overnight cash rate by 25 basis points to 1.75%. Disinflation seems to have been the motivating factor affecting the board’s decision. The statement noted straight away that1 “...This follows information showing inflationary pressures are lower than expected...”   Indeed, there seems to be no sustained reversal of disinflationary trends, globally. Even in, arguably, the best recovering economy, the US Federal Reserve has been finding it difficult to make the case for a base rate increase. It has been 5 quarters since the Fed first signaled an unwinding of accommodative policies. This was followed by non-action in June and September of 2015, one 25 bases point increase in December followed by non-action in January and March of 2016. Had the evidence been stronger, a full 100 bases point increase should have been worked by now, according to their plans.

Although China may appear to be the kernel of the global of disinflation, this is likely not the case. It was unrealistic to expect continued 11% to 15% growth rates for any extended period of time, (although it did last for quite a convincing while). It was inevitable that the day would come when enough wealth had been accumulated and redistributed to change the course of China’s economy naturally, let alone the need for a state guided plan to help it along. The global problem, unfortunately, seems have been too much medium to long term capital investment in a sustained but unpredictable commodity production boom. Australia’s natural resource wealth and geographic location made it the ideal candidate to feed the Chinese industrial dragon and the Aussie mining industry was in its rights to go full throttle. Other resource rich nations, Brazil for instance, have now reached the very same macro-economic impasse, also having gone full throttle. Brazil’s major exports are almost entirely Soybean, Iron Ore and Petroleum; nearly 39% of these exports are destined for the Asia-Pacific and nearly 23% to Europe.

Although Brazil’s Asia-Pacific export market is impressive, it’s well short of the 84% Asia-Pacific market share of Australia; almost entirely Iron Ore and Petroleum.  Outside of commodity producers, many other advanced economies outsourced manufacturing to China, again, planning for the long term when the advantage was medium term, at best. Growing demand for China’s industrial capacity led to increased capital inflow and wealth distribution, contributing to the natural evolution of its domestic economy. In fact, the consequences of extended of capital inflow were realized in an inflated property market as well as extended equity markets. 

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