Outlook for Australia dollar (AUD)

The Australia dollar is charging ahead in recent trading. The AUD was always destined to be a strong or 'hard' currency given its outlook. This outlook is inextricably tied to the success of China and India, which largely rests on the 'small government', 'selective government' and irrelevance of government. Basically, in China the government is incidental. Rule of law is inoperative, so market rules, albeit with little integrity. If you are expecting China to become a market paradise, think again. China is only going to develop coherent market values if the West does, and sadly ideas don't have much sway in the West either. We are in a scientific era to be sure, but science is the product of a small (2-3% minority), and under our democratic tradition, the idiots retain power.

So let's get back to China. China has a huge population. This means that farmers will be flooding into the cities in order to get higher paying factory jobs. This is great news for Chinese productivity, wealth creation, and it keeps inflation in check around the world. They get cheap raw materials from Australia, Russia and Mongolia. Fears of a Chinese melt down or ci

vil unrest are misplaced. In fact, China has a great deal of mineral resources in the outer provinces, so those areas are likely to become future centres of output....perhaps the food basket for China as we extort higher prices for agricultural products in the seaborne market place.

China will be like this for at least another 20 years, which means that it will have an insatiable demand for food and minerals for the next 20 years. The implication is that Australia will be in a strong position to benefit from exports of ores. Both strong growth in export volumes and high prices are assured. Of course there will be competition at the margin from China and Russia. It remains to be seen whether India will play a significant role. This will depend I think on political reform in that country. Representative democracy is not the 'god-send' it is supposed to be. India can only flourish, like the West, when the recognise that, and identify consensus

based democracy as a better mode of governance. It is the only way to end the tyranny of the majority, who are idiots. In India's case, uneducated idiots; and in Australia's case, morally skeptical idiots too accustomed to not paying the consequences for their actions, i.e. Not thinking. And I have yet to speak of the 'enablers', whether corporate CEOs, parents or politicians.

Anyway, back to Australia.

Australia really has no problem in future. More capital is going to flood into this coun

try than you can imagine, funding mines and energy projects mostly. A huge wealth effect for what is a very small population. Of course we might expect two things:

1. A materialistic splurge as people buy more houses, etc

2. Governments staking more of this wealth threw resource rent taxes

3. Decadence of all sorts resulting in greater crime, drugs and rock n roll. Yep, may

be even a sexual revolution. Let's hope, I missed the last one :) I was born in 1968.

Looking at the chart, its apparent that the AUD is just about to reach its 6mth high of 0.93 USD. We might expect a sell-off at this point, however its probably likely to continue to its 2-year high of 0.96, set back in July 2008.

At such times the currency has a tendency to fall back because spending gets out of control. Is that going to happen this time? Hmmm...that will depend. I suggest 'No' for the following reasons:

1. An overheating Australian economy is going to place pressure on the Reserve Bank to raise interest rates, so you will be able to spend less on consumerism, and you will be forced to pay more off your debt. You ought to already be doing this, or buying gold stocks.

2. Australia household debt levels are high, so this monetary policy will be very effective

3. The Australian govt will prefer to allow the AUD to rise rather than raising interest rates, because its constituency is the poor households rather than rich farmers and miners. You might expect the 'farmer-friendly' Independents to make a difference, but I doubt it, because I don't think they even know what monetary policy is.

What does all this mean? It means strong AUD for a while now - either way. More likely there will be a balance of interest rate rises to temper a strong economy. We need to consider the 'flow on' of that trade balance. Will it translate into benefits for Australian households? Yep, in terms of lower interest rates than otherwise, and low price pressures from imports.

4. We might expect a lot of Australians to be holidaying in the USA. We are not accustomed to being on par with Americans

5. The big caveat is how the Labor govt behaves. They are inclined to sabotage the economy of late, and the Independents do not inspire confidence.

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Andrew Sheldon www.sheldonthinks.com