Some Comments On The Euro And The Australian Dollar

ECB President Mario Draghi took his team of traveling bankers to Ljubljana, Slovenia, population about 272K, and about 801km. away from Frankfurt. Despite the new venue, it does not appear the bankers have any different policies that will address the various needs and wishes of all parties.

As expected, the ECB will keep the bank rate at .75%. Draghi is ready to loan money to the needy debtor-nations, and he claims the "euro's here to stay." There are some unanswered questions. Exactly what are the lending terms? Will they make the Bundesbank sadistically happy, as the economy of the recipient nation shrivels away? This will lower tax receipts and make austerity even more severe - sure the euro will remain, but will the membership remain the same?

The initial market reaction is bullish on both the euro, which has traded above the 1.30 handle, but still within the wide 1.2825 to 1.3165 range we identified Wednesday. The ECB news was given as a reason for US equities to trade higher while the European markets were mixed.

Sometimes markets are in a zone and - no matter the news - they go up or down. As an example, yesterday (Thursday) US Factory Orders were down 5.2%, but this is less than the 5.9% forecast, so it is bullish. Go figure.

Last night the Australian M/M Retail Sales number came out up 0.2%, but less than the 0.4% expected. Earlier in the week the RBA reduced the bank rate to 3.25% down 25bp. This was followed by another monthly trade deficit, this time 2,027M larger than the expected 686M and more than the previous month 1,530M (all AUD's).

In late August, we expressed our view that the Australian dollar is due for a sell-off. Then, we suspected the mining boom would slow, but this would not deter the Australian's demand for imported products. Today the CanberraTimes.com had these comments:

Retailers have been suffering in the face of intense foreign and online competition, while consumers seem to have fallen out of love with department stores where sales have been especially weak.

Industry figures out this week showed sales of new homes hit a 15-year trough in August while turnover in all home sales is a third lower now than the average of the previous decade, draining demand for household goods like furniture and fridges.

Yet none of this has stopped Australians splashing out on new cars. Vehicles sales jumped to a record high in September, with sales of sports utility vehicles up a racy 21 per cent over the past 12 months.

It is also notable that Australians continue to travel abroad in record numbers, taking advantage of a still-high currency, just part of a trend toward spending more on services and experiences than on retail goods.

It does look like the longer-term bear factors that we mentioned in August are still in place, namely a slowing global economy, a cooling of the commodity demand, longer-term lower Aussie rates, and a continued balance of payment deficit.

When some of the global bullish fever wanes, we think the AUD is a sale for a trip under parity with the USD.