Why the Australian Dollar is Not as Strong as You Think

There's a fair chance the RBA will drop rates again when they next meet in February. After reading Glenn Stevens' last statement, we got the impression that he really didn't want to cut rates at all...but he did so to take pressure off the Australian dollar. And then the dollar rallied because he sounded like he was done cutting...

Steven's is far too sober and responsible to be a world class central banker. If he wants a weaker Australian dollar, he's got to earn it. He needs to start targeting iron ore prices or something similarly idiotic. Only then will Australia's creditors start to wonder whether they should keep lending at such a high price.

Because they're not too bothered by the fact that Australia keeps spending more than it earns, and have done, with ever greater voracity, since the mid-1970s. The chart below illustrates the over-consumption nicely.

It shows Australia's current account, which is in deficit. It's a combination of the balance of trade and Australia's net income payments to the rest of the world (built up over the years resulting from overconsumption...the trade deficit).

There's nothing particularly wrong with a bit of over-consumption, especially if you need to buy income producing capital goods on credit. But that's clearly not happening in Australia. As you can see from the chart, Australia's financial position has become worse over the decades. And at the same time, the Australian dollar gets stronger!

But only if you measure it against other dud currencies. Measured against a wealth preserver like gold, the Aussie dollar is not as strong as you think.