How’s the Aussie doing?

The IPA weekly update, Hey, has a great picture.

Data are here.
Has the Aussie fallen relative to other commodity currencies because
(a) the new mining tax?
(b) the Rudd government’s debt and deficits?
(c) both (a) and (b)
(d) evil neo-liberal economics?
(e) don’t ask me, I voted liberal?

Update: Some of the comments in the thread suggest the graph is ad hoc. In one sense it is, afterall it is just a graph of prices. But there is a serious question to be asked and answered and some are calling for theoretical guidance. Under some basic assumptions it is possible to derive the flex-price exchange model. This model suggests that the relative demand and supply of money determines the exchange rate. So assuming that purchasing power parity holds true in both the short-run and the long run and uncovered interest rate parity holds true (domestic and foreign bonds are perfect substitutes) we can set off.

(That derivation comes from Hallwood and MacDonald – I taught out of this book for a few semesters until the students complained it was too hard and then moved to Pilbeam.)
So the exchange rate is a function of relative money supply, relative income and relative interest rates. Increases in st imply a depreciation and decreases in st imply an appreciation (to go down is to appreciate). Some of the comments in the thread imply that all the action is in (i – i*) – if the RBA were to stop increasing interest rates or even lower them then that could cause the Aussie to decline. That is an explanation. Another explanation is that an economically irresponsible government would cause a relative decline in Australian national income through an expansion of the state at the expense of the productive sector of the economy i.e. (y – y*) could increase, leading to a depreciation relative to other currencies.

Okay, so what about the relative interest rate story? We have a very nasty looking yield curve here. So that could be part of the story. This raises the question, why is the Australian economy vulnerable to events in far away Greece? Or even Euroland? Why has our currency depreciated vis-a-vis the New Zealand dollar?

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111 Responses to How’s the Aussie doing?

  1. Jt

    Or more realistically

    (f) reduced expectations for interest rate rises
    (g) increased risk aversion and unwinding of the carry trade

  2. JC

    d) of course. Which is why Rudd and Swandive are fast tracking as quickly as they can to the Bolivarian revolution.

  3. I still demand an apology from Homer. My split sample analysis shows his argument is dopier than what the graph does.

    Homer assumes that the Australian dollar is linked the global fortunes that it drives everything.

    However, I showed that before and after the PIIGS crisis began, it was rising relative to the USD, but fell only after the RSPT announcement, which brought the whole sample down so over the whole period from the start of this eyar there is a net fall.

  4. C.L.

    Hide the decline, hey Homer? ;)

  5. Won’t this make our commodoties more competetive? Just sayin’.

  6. Adrien – yep.

    Why do you think the AWU would back the RSPT?

  7. sdfc

    The Aussie behaves as it always does when risk appetite evaporates and rate hike expectations unwind. Shock horror.

  8. Why do you think the AWU would back the RSPT?

    .
    Cause their a hatful of arseholes? :)

  9. JC

    It’s about time you offered a nice apology, Homer. An apology to the entire readership.

    You goose.

  10. JC

    SDFC:

    Yes we know that the Aussie is based in liquidity preferences, but surely even you would agree that the Aussie was unable to even hold itself up against the Euro and was weaker that the other exporters.

    There was also a load of portfolio exiting.

    You’re not doubting that, are you?

  11. rog

    Malcolm Fraser doesn’t vote Liberal, neither does his wife.

    That puts them into the majority

    Hey!

  12. JC

    It’s even shorter than the Carpentry Institute chart making the same point, Wodge.

  13. JC

    Malcolm Fraser doesn’t vote Liberal, neither does his wife.

    That puts them into the majority

    Hey!

    The thread’s about the Aussie’s moves and Wodgie wants to talk about Mal.

    Fme.

  14. rog

    Thats not an explanation, its a printout.

    $A up today, so therefore……hey!

  15. JC

    It’s up because there are strong rumors they will fold, Wodge.

    hey?

  16. “Thats not an explanation, its a printout.”

    I have an explanation at the bottom. The printout was necessary to silence Homer who himself never provides ANY proof of his absurd claims except for lifted pieces from Brad de Long.

  17. rog

    The thread’s about the Aussie’s moves and jc wants to talk about Homer.

    Fjc

  18. JC

    Wodge obviously got out of the cellar after that idiot homer left the door unlocked.

  19. JC

    Wodge the thread wasn’t really derailed before you got here and spewed a little poison. You pathetic loser.

  20. This is the explanation rog.

    “So Homer, the subperiods of the Greek crisis and the RSPT are different to the whole sample.

    Whole sample: negative relationship AUD/USD.

    Sub smaple until Greek crisis: positive.

    Sub sample from Greek crisis to RSPT: positive.

    Sub sample from RSPT until now:: negative.

    Therefore we can conclude that the RSPT was responsible for the depreciation over the whole calendar year so far. Furthermore, the AUD rose due to the Greek crisis.

    This totally repudiates your theory and defence of the RSPT, and your deflection to the PIIGS.

    Since you were very uncivil and made insults above your pay grade on the presumption you were correct, I demand an apology to all parties offended.

    Please man up and admit you were wrong – and that the RSPT caused a flight of capital and increased Australia’s sovereign risk.”

  21. rog

    Sometime libertarian jc attempts to take control of thread, says the thread is about $A

    jc forgets that the thread offers various answers including
    e) don’t ask me, I voted liberal?

    Which is as pertinent as jc isnt

  22. rog

    Thats all very well SRL, but is it safe for kids?

  23. JC

    Sometime libertarian? Lol

    Wodge, people are not like you. They don’t suddenly take a vertical dive from their belief system and commence those people they shared those same beliefs with over the weekend.

    That’s why you’re about as popular as a stick bomb here.

    We blame it on Geoffrey.

    Go away, you turnip.

  24. “The Aussie behaves as it always does when risk appetite evaporates and rate hike expectations unwind. Shock horror.”

    Note that the dollar rose relatively for short period after the RBA decision to keep rates on hold rather than raising them. This does not reflect upon a fall in rate expectations boosting the dollar…as you predict the opposite effect.

    The RSPT is responsible. You cannot deflect this onto the RBA, the PIIGS or a slowdown in global GDP. Otherwise there would be no decoupling Australia had from the currency basket in the graph above.

  25. JC

    oops commence attacking..

  26. “Thats all very well SRL, but is it safe for kids?”

    I’m an ivory tower first libertarian, rog.

    JC, he’s taking the piss out of Menzies House. Go along with the joke, it’s a good one.

  27. JC

    “The Aussie behaves as it always does when risk appetite evaporates and rate hike expectations unwind. Shock horror.”

    That’s not true anyway. I sold the Aussie the Friday before they announced as the rumors were very strong on that alone.

    Any trader worth his salt did exactly what I did.

  28. sdfc

    JC I’ve got no doubt that at the margin the RSPT has had an impact on the size of the decline given the amount of hysteria about the tax among the major mining companies and some commentators. However the Aussie didn’t really start hitting the skids until a week after the budget. When global markets went into a tail spin. That the Aussie has fallen even against the euro should not be a surprise given its status as as the ultimate global risk barometer and the fact that rate markets are now pricing in a small chance of a rate cut this year, rather than a couple of rises. I reckon market pricing for rate cuts is bullshit but there you go. I don’t understand current OIS pricing at all.

  29. rog

    You dont have a belief system jc, you are chemically reactive

    Do you have some property rights over catallaxy? you attempt to exercise them, I wonder if you have any legitimate claim

    “people are not like you.”

    Another symptom of the disease, jc believes he represents “the people” Keep on posturing Capt Wonderful

  30. Labor Outsider

    As jt implies, this post shows either extraordinary ignorance of macroeconomics or is deliberately deceptive.

    How can you have a discussion about what is driving movements in relative exchange rates without discussing market expectations for future short-term interest rates? Take the comparison between the Canadian dollar and the Australian dollar. Sure, Canadian exports are also heavy in commodities, but the current target for the overnight interest rate in Canada is 0.25%, where it has been since March 2009! In contrast, the overnight cash rate in Australia has increased by 150 basis points since April 2009! While concerns about the RSPT may have played some small role in the relative decline of the AUD, far more likely is the rapid turn around in relative interest rate expecations over the past month or so related to changed expectations about global conditions and the partial unwinding of the carry trade.

    While reduced commodity demand will affect Canada as well, monetary policy settings are mor or less already at emergency levels and the events of the past month or so have had a much reduced impact on interest rate expectations.

    And the line on fiscal policy must be a joke. The dollar has been depreciating against currencies with far worse short term and long term fiscal outlooks than Australia.

    Sinclair, you write a lot of good and interesting stuff, but these posts that basically recycle liberal party talking points undermine catallaxy’s credibility enormously.

    You have written a number of posts recently for example getting stuck into the government’s use of an econometric study that should not have been used to support the policy position. Fair enough. But here you are, making inferences about exchange rate movements without any proper empirical evidence and excluding a variable from your discussion that every macroeconomist knows is a key exchange rate determinant.

    What gives?

  31. LO

    Read my very quick and dirty analysis and tell me what you think.

    Sure there may be omitted variable bias, but it’s very strong otherwise.

  32. Michael Fisk

    Rudd’s phony compassion has killed 100 illegal immigrants:

    SENIOR government officials have privately conceded that a refugee boat that disappeared late last year en route to Australia probably sank, resulting in the loss of more than 100 men, women and children.

    http://www.theaustralian.com.au/news/nation/refugee-boat-feared-sunk/story-e6frg6nf-1225871765896

    The man just leaves a trail of bodies wherever he goes. That’s now 159 illegal immigrants in total who have been killed by Rudd’s “compassion”. Add to that the four people who were electrocuted by his “stimulus” scheme (let’s not forget the Victorian fire holocaust, presided over by the Labor Party and fuelled by their loony forest policies).

    It’s offical: a vote for Labor is a vote for mass drowning and incineration.

  33. JC

    Take the comparison between the Canadian dollar and the Australian dollar. Sure, Canadian exports are also heavy in commodities, but the current target for the overnight interest rate in Canada is 0.25%, where it has been since March 2009! In contrast, the overnight cash rate in Australia has increased by 150 basis points since April 2009!

    Great another currency expert.

    So with the Aussie/can spread so wide you think this gives your story added strength that it was the reason the Aussie fell far more than the Canada.

    Anecdotal, the Friday before they announced the heist there were strong rumors that they were going to announce this policy and the currency began to wobble.

    There was also a ton of equity selling all week from offshore as people began to get out.

    Morgan Stanley put out a note to sell the Aussie Dollar based on the heist alone.

    “The large mining companies, such as Rio Tinto and BHP, have already noted that this change alters their expected investment profile; it has also put some new projects in doubt. Morgan Stanley’s Australian resources equity analysts estimate that the potential reduction in company valuations may be up to 37% (“Valuation downside on new royalty taxes”, Australia Nonferrous Metals and Mining, April 28, 2010).
    The mining sector has made up a significant part of Australia’s growth in recent years (see Exhibit 1), protecting it somewhat from the global financial and economic turmoil. This has enabled Australia’s outperformance in terms of GDP growth, interest rates and ultimately the AUD. The implementation of this tax, assuming that it does decrease corporate activity, mining investment projects and potentially mining volumes and exports, counteracts high commodity prices in terms of the sector’s benefit to the currency.

    Our portfolio is also short AUD, one of our highest-conviction positions.

    Thanks for the currency trading lesson, LO.

  34. JC

    SDFC

    Interest futures, although pointing slightly down were not suggesting a huge rate cutting spree in Australia at the time the currency took a huge dive.

    I’m telling you there were significant portfolio shifts that occurred through the week.

    No one it far that is suggesting the currency fell , that it fell alone on the news of the stealing.

    However to suggest that a multiples compression in the only growth sector in the economy other than school dunnies and the tail end of real estate speculation in the capital cities did not have an effect on the currency is frankly bullshit.

  35. JC

    oops No one, so far that is suggesting the currency fell….

  36. Sinclair Davidson

    LO – its a nice picture and people complain the blog is too wonkish. SRL has some regressions that I’ll tidy up the presentation and post later – but in the meantime feel free to speculate on why the Aussie is tanking.

  37. rog

    Morgan Stanley also said that miners has been oversold and they saw “substantial value in Australian stocks, particularly mining stocks”

  38. Sinclair Davidson

    Especially for foreigners now that the currency is so weak.

  39. sdfc

    SRL

    The RBA jacked the cash rate up a further 25 points in May and then signalled the pause that was always on the cards now the standard variable mortgage rate is at its decade average. The market was still pricing in a 5% cash rate by the end of the year. If you dount the Aussie’s status as a global risk asset check out the correlation with the S&P500.

    European equities are currently 2% higher in this session and the Aussie is back over 84c as we speak.

    JC

    Its not about huge expectations for rate cuts but rather the change in expectations from rate hikes this year to current pricing for no rate hikes.

  40. JC

    So what, Wodge. Most of the brokers are saying that. They also told their clients there was a material drop in the mega miners NPV’s too.

    They’ve fallen to a level where they think the market has discounted the drop. If you wanna believe what they’re saying then go ahead and buy the stock.

    The mega miners form a largest part of mining market cap. However they aren’t the only mining players.

  41. JC

    Thanks for the market scoop, SFDC, but I have it on two other screens in front of me, so I know what’s going on.

    It’s like talking to dunny doors with some of you guys.

    I’ll repeat there’s no one at this site who says the aussie partially fell as a result of the heist fell for that reason alone. However it was a contributory factor.

    If you and the other denialists want to think that the portfolio managers are quite okay with sizable multiple compression brought on by a tax heist then go ahead, be my guest. Just keep repeating it to yourselves and perhaps you could get Phil Jones to write up a peer reviewed summary to that effect. I hear he’s really good at bullshitting.

  42. Labor Outsider

    Indeed, SDFC. What matters is not whether the market is pricing in large cuts in the overnight cash rate here, but the change in expectations. In a regression, you would need to include the change in relative interest rate expectations over the coming 12 months (using say overnight indexed swaps) over the period in which the AUD has depreciated. The carry trade is highly relevent here and simply will not have had as much influence on the Candadian dollar because with short-term interest rates so low there it is NOT a high yielding currency.

    Even looking at the graph it seems unlikely that the RSPT could be the main factor behind the relative depreciation, given that most of the relative move (vis a vis the other commodity currencies) occurred more than 3 days after the RSPT was announced.

    JC, one investment bank’s position in the currency market does not invalidate my argument. I never said that there would not be some investors downweighting AUD assets as a result of the RSPT. However, there are others that have taken the view that the impact of the RSPT is likely to be small.

    My broader point is that there are a number of potential hypotheses for the relative depreciation and without good empirical analysis that tests them all within the same model, your analysis only qualifies as speculation.

    Let’s say I thought there were three main factors influencing the AUD over the past few weeks – change in interest rate expecations, the RSPT, and a general increase in risk aversion unrelated to the RSPT. How would you test which had the largest impact on the currency over that period? Simply putting up a graph of the AUD movement against other commodity currencies simply does not cut it as there are other omitted variables.

    It is completely plausible that of the 6% relative depreciation agains the canadian dollar, only a tiny fraction is due to the RSPT.

    Anyway, I’ll be interested to take a look at the regressions and in particular whether they are controlling for all the relevent variables.

  43. JC

    JC, one investment bank’s position in the currency market does not invalidate my argument.

    No offense, but I’ll take Morgan Stanley’s advice on these things over yours. If you think you’re better I’d be happy to have you paper trade the Aussie for a year and see how you go. In fact you could do it on the open forum every time you wish to trade a currency and we’ll tally it all up at the end of the year and see how you’ve done. I’m serious.

    I never said that there would not be some investors downweighting AUD assets as a result of the RSPT. However, there are others that have taken the view that the impact of the RSPT is likely to be small.

    Oh okay thanks for explaining market mechanics, LO. Let me see how that goes:

    Downweighting occured because of the tax heist, as the market adjusted for it, then buyers came in once they thought the tax has been discounted. Wow! Who the fuck would have thought that’s how markets work?

    My broader point is that there are a number of potential hypotheses for the relative depreciation and without good empirical analysis that tests them all within the same model, your analysis only qualifies as speculation.

    A model now for testing currencies. Go ahead, test one, Lo. And if you’re model is predictive I will assume you’ll be parking your boat next to Abromavich’s smaller one in the French Riviera this year.

    Let’s say I thought there were three main factors influencing the AUD over the past few weeks – change in interest rate expecations, the RSPT, and a general increase in risk aversion unrelated to the RSPT. How would you test which had the largest impact on the currency over that period? Simply putting up a graph of the AUD movement against other commodity currencies simply does not cut it as there are other omitted variables.

    Okay, but you left out multiple compression in our most significant export earner and the one foreigners are only interested in these days. No one out of the country is buying the semi-depressed domestic shit here, LO. They’re not buying the pallet makers.

    It is completely plausible that of the 6% relative depreciation agains the canadian dollar, only a tiny fraction is due to the RSPT.

    It’s also completely plausible that a male can have a sex change too, but so what/? Read what I said immediately above.

    Anyway, I’ll be interested to take a look at the regressions and in particular whether they are controlling for all the relevent variables.

    Go ahead. I have a pretty decent chart on the Aussie and I use several variables. The one that tells me trouble is brewing is the 40-ma envelope with a 2.25% spread to the underlying. It broke through that like a hot knife through butter as foreigners were selling out of stocks.

  44. Labor Outsider

    SRL – I took a look at your regressions and unfortunately I don’t think you can infer much from them. The omitted variable bias is just too strong. As I suggested earlier, what you would need is a regression of the spread of the AUD against one of the commodity currencies, with daily information on news reflecting changes in market expectations about: a) the impact of the RSPT; b) changes in expectations about short-term interest rates; c) changes in expectations about global risk associated with Europe’s travails, financial market regulation, etc. It is not implausible that the RSPT has had some impact on the currency, but it makes a big difference whether this impact has been small relative to those other factors or large.

  45. Labor Outsider

    JC, I’m a professional macroeconomist. I work in an international organisation. I don’t give a crap if you think the Morgan Stanley’s analysis is superior to my own. Whether you understand the point or not, there is a big omitted variable bias here, and unless you control for it, your analysis is meaningless. The crap about shares is also useless given the correlation of those share movements with the other variables that influence the exchange rate.

  46. JC

    but it makes a big difference whether this impact has been small relative to those other factors or large.

    Yea, it’s small :-) . We need a model to tell us… as though no one’s ever thought of that before.

    LO .. Here’s your fucking mode. It’s BHP’s ADR traded on the NYSE. It basically trades when everyone in oz is tucked in and it trades in US dollars as it’s American depository receipts. In other words only foreigners touch it.

    It fell 24% from when rumors started in late April. That’s a freaking fall for a big cap stock in any language. Only foreigners trade that stuff.

    http://www.google.com/finance?q=NYSE:BHP

  47. Sinclair Davidson

    updated with the flex-price forex model. LO what’s the story? (y – y*) or (i – i*). If latter, why are we being affected by a Euroland sovereign debt problem?

  48. JC

    LO

    I don’t give a shit if you were the RBA governor or the chief economist at the Fed. You have no freaking idea what you’re talking about at all.

    Develop a predicative model and see how far you go. Go on. I’d like to see it.

    The one reason and the reason alone why Morgan Stanley is important is because a lot of people listen to their views as they’re a highly respected operation around the world.

    As I said and I’ll repeat it one more time. IF you think multiple compression as a result of a heist like the one these dolts are trying to pull had little to no effect on the market then I suggest you hang up your spurs as you don’t know what you’re talking about.

  49. Labor Outsider

    I looked that data up. BHP have fallen 17.3% on the NYSE since April 27. Over the same period, Vale have fallen by just over 16%. Given that Vale don’t have operations in Australia, that would suggest that by far the best explanation for the large fall in both stocks is the change in the global outlook for commodities.

  50. Sinclair Davidson

    Hang on. BHP have a beta of 1.4 and Vale a beta of 1.65. Given a given market decline BHP have fallen much more than we’d expect.

  51. Labor Outsider

    Sinclair

    (y-y*) and (i-i*) are jointly determined. Expectations about global commodity prices have fallen significantly in recent weeks. That is partly because markets think that the euro zone problems will not be contained within Europe. There have also been concerns recently about the impact of US financial regulation and the outlook for China. Those changes may have had a bigger impact on the expected interest rate differential in Australia given policy tightening that occurred in recent months and the importance of metals commodities to the Australian business cycle. You also have to take into account heightened risk aversion and the impact that has on a currency that was being pushed up earlier by the carry trade. As risk positions unwind (just look at what the yen has done recently) the AUD gets an additional hit. Think about the AUD relative to NZ. Sure, both are affected by the commodity cycle (though NZ not by metal commodities), but the RBNZ hasn’t changed the short-term interest rate since the middle of last year. Again, much more similar to Canada. Recent movements seem very explainable to me in terms of a market that had become very bullish about Australia has pulled back a bit as problems in the euro zone have precipitated a general reassessment of the pace of the global recovery.

  52. JC

    Your wrong. BHP has fallen 24% over this period.

    get the fact straight, LO. Let’s not do Wombat-Henry here.

  53. Labor Outsider

    So, JC, your argument is that it is impossible to explain what has happened to the currency using the variables I have discussed, yet you are able to attribute the change to the RSPT? How does MS make money if not by having an implicit model of exchange rate determination? You are talking bullshit as usual. I didn’t say that there would be no impact from the RSPT. I said that what is more important is the relative size of the impact. For all your hyperbole you have no way of answering this question.

  54. JC

    LO… at 10.32. You’re given us things we already know and accept.

    You’re blindly suggesting that the heist had no effect. We’re saying that it was part of the mix.

  55. JC

    Lo:

    Morgan Stanley DOES not make it’s money trading currency on a prop basis using a model. The idea is laughable in the extreme. The prop traders there or at goldman would use a number of things to help them, but they don’t use a model and if they did it would be small.

    I’ve had a ton of experience with “mdoels”. They don’t work. There’s a guy on every corner of Wall Street trying to sell one to an I bank or a hedge fund.

    Like all models, they work in a trending market and then give it all away when the trend either reverses suddenly like we saw with the Aussie or does nothing for a while and just bounces around.

    As I said, if you can build a predictive model, more power to you and I’ll say that you will become very rich soon.

  56. Labor Outsider

    JC, according to the NYSE website the stock was trading at around $75 on the 27th of April and was trading just above $62 at the cloae of trading yesterday. You would of course not expect Vale and BHP to trade identically given they have different commodity portfolios and different cost profiles. And of course, only one of those companies has been talking down its stock in recent weeks ;)

  57. JC

    So, JC, your argument is that it is impossible to explain what has happened to the currency using the variables I have discussed, yet you are able to attribute the change to the RSPT?

    That’s not what I said at all. I said that the effect is there but to quantify it. We know that numerous overseas investors dumped their mining stock immediately after those two bozos tried to start a class war. We know that for a fact.

    I can say that it had a material effect.

    On the other hand you’re more or less trying to deny it.

  58. Labor Outsider

    JC, you have said more than it was part of the mix. In just about every post you have written on this blog post, and others, over the past few days, you have been claiming it as the dominant factor. The blog post above managed to list a bunch of factors without even mentioning interest rate expectations. I was making the highly relevent point that the ommission of a factor that all exchange rate models include was more than a little strange.

    I’m aware of the difference between essentially chartist trading and fundamentals trading. And I am also aware that it is hard to go past a random walk when forecasting exchange rates. But the quote you gave above on the reasons for Morgan’s sell recommendation were economic and hence based on fundamentals. You are telling an economic story in essence. I’m merely pointing out that there are other economic explanations that are equally plausible.

  59. JC

    It closed at 78.31 on the 26th and went to $59.20 at its lows. It’s gone up in the past few days on strong rumors that the two dolts are backing out of the theft.

    It’s far more accurate to measure the spread like I’ve done as the lows were when there was no rumor they were backing out.

  60. JC

    LO:

    I personally think it was the dominant story, as I recall that BHP didn’t fall so hard so quickly in the GFC. It took time.

    This fall here was pretty huge and the vale comparison isn’t that relevant in my book because they’re in an emerging market while BHP isn’t.

    Until now we’re were thought of as G7 equivalent.

  61. Labor Outsider

    Actually JC it is not more accurate to use the high-low rather than the full period change as you cannot know what proportion of the recent increase is due to the rumours, and what proportion is due to the overall change in market sentiment about commodity prospects that have nothing to do with the RSPT. It is an identical problem to trying to determine how much of the earlier fall can be attributed to the RSPT. In econometric parlance, you have an identification problem.

    Btw – between the 26th of September 2008 and the 27th of October 2008, BHP’s share price (ADR in USD) fell by 50% according to Datastream. That movement dwarfs what we have seen during this episode.

  62. Labor Outsider

    There was a single day at the end of September 2008 where BHP’s share price fell by 16%….

  63. JC

    LO:

    I can’t recall that day, but I’ll take your word for it. And market vol was at 85% in those times.

    Here’s the problem with your interest rate theory. If the market had suddenly switched from a higher rate to a lower rate perception it would also applied to all the other commodity players to just here in isolation.

    I honestly don’t understand how on earth you think you can quantify these entire set of events that were happening at one time.

    I believe the heist attempt was the dominant factor simply because of what was going on in the equity markets.

    You can argue all you like about interest rate expectations etc., however you seem to be doing your best to avoiding the fact that a fairly important bit of news hit the market for which you expect little to no reaction.

    You have to be kidding.

    I’m a professional currency trader and have been for a very long long time.

    This event was one of the few times I went all in and bet the ranch on this one event: the heist having a material impact. I was right and no amount of trying to pretend this wasn’t important won’t change the fact that it was.

    There were also very strong rumors that the ECB was going to QE by essentially monetizing the Greek debt during those days, so even the the ECB was perceived to have a potentially much easier interest rate during that time, yet we fell against the Euro.

  64. Labor Outsider

    JC – the ECB’s intervention in bond markets was: a) small; and b) sterilised, so that does not at all invalidate the interest rate expectations hypothesis. It is reasonable to expect the ECB policy rate to be kept lower for longer, but again, what matters is the relative change in expectations. Besides which, flight from generalised risk is also an additional factor at play in the AUD story.

    And again, I did not say that the RSPT had no effect, just that you are and have been exaggerating the impact given the many other factors that one would also have expected to affect the exchange rate over this period.

    I’m not suggesting all of these factors can be easily quantified. Quite the opposite. What I am saying is that the graph in the original post making a simplistic comparison with other commodity currencies does not cut it, nor does SRL’s econometric analysis. In a sense, we have multiple explanations for the same phenomenon.

    But given you are a currency trader I simply do not believe you when you say that the AUD movements in recent times are unrelated to changes in interest rate expectations. If you do genuinely believe that, I’m glad that you aren’t managing my money…

    Just today, citi issued a note on Norway saying that the euro’s woes have reduced the probability of interest rate increases and any such increases would likely result in an appreciation of the currency. There is nothing at all controversial about my statements about the role of interest rate expectations.

    And one final thing. During the height of the financial crisis the AUD depreciated against the NZD by 10%! Get that. 10%!. That was a commodity/risk/interest rate expectations story. Funnily enough, the last few weeks have been a muted version of that episode. Face it, the AUD is a great proxy for global risk appetite. Even more than many other commodity currencies. It is not at all surprising that we have depreciated more than they have against the USD in recent weeks.

  65. Labor Outsider

    Hi Sinclair

    Thanks for the update to the post. Only just read through it. Further up I’ve given a few explanations for why the Australian economy and AUD might be vulnerable to far off events. To repeat, the AUD becomes vulnerable when those far off events have a material impact on expectations for global growth, commodity demand and general appetite for risk. Witness how the AUD behaved after Lehmann collapsed in September 2008. In a month we had depreciated 10% against even the NZD. It is hard to rationalise that on the basis of anything the Rudd government did at the time. This shock is smaller, and the movements have been correspondingly smaller, but it is pretty clear that the markets have not seen the turmoil in the euro zone as an exclusively european problem.

  66. JC

    Did you read what I said, or do you just ignore comments that don’t suit, lo.

    I said that the market perception regarding interest rates was an equal weighting on all the currencies including that bastion of strength, the SA rand which we also saw the Aussie fall against it.

    I understand that the ECB was sterilizing the although I haven’t yet seen the sterilization go through it books but perhaps I don’t know where to look exactly. What I said was there were rumors, strong ones that they were going to move to straight QE all through last week.

    When did I say, I didn’t think some of the move was related to interest rates expectations? Show me where I said that. What I said was that I don’t think that was the dominant factor.I think the heist was.

    Even Moodys came out and warned there were concerns with Australia, albeit not from its credit agency but from another forecasting unit.

    If you’re trying to sell me the story that the Aussie is a liquidity/risk preference one, don’t even bother as I was aware of that long before you were.

    Combine a liquidity/risk preference downshift with a sudden attempt to steal from the better performing sector, start a class war and sprinkle it with xenophobia and you end up with a potential currency crisis. That’s why the RBA had to intervene twice to stop the rout.

  67. Labor Outsider

    “I said that the market perception regarding interest rates was an equal weighting on all the currencies including that bastion of strength, the SA rand which we also saw the Aussie fall against it.”

    And I have made it very clear that this argument is wrong.

    I have read many of your posts in recent days and you have barely mentioned changes in interest rate expectations, just repeatedly rammed home the line that it is almost entirely due to the RSPT. The empirical evidence for that claim is weak.

    FFS the AUD is at 84 cents against the USD and 68 cents against the euro. Some currency crisis.

  68. JC

    And I have made it very clear that this argument is wrong.

    Yea you have, which is why you don’t seem to understand risk.

    I have read many of your posts in recent days and you have barely mentioned changes in interest rate expectations, just repeatedly rammed home the line that it is almost entirely due to the RSPT. The empirical evidence for that claim is weak.

    I’ve mentioned it probably countless times that i think the stealing was the dominant factor.

    FFS the AUD is at 84 cents against the USD and 68 cents against the euro. Some currency crisis.

    Who said it was a currency crisis although it was about to be if the RBA didn’t step in and stop the rout.

    Give it a little more time and I’m sure your friends in government will be able to snatch defeat from the jaws of victory like they continue to.

    You said earlier that you or others can create predictive models for exchange rates. I’m still waiting for the result.

  69. JC

    You know what, Lo? You’re right the tax has been hotly received by investors and it had the effect of raising the value of the Aussie until the Greece problem became worse. You make some good points.

  70. Butterfield, Bloomfiled & Bishop

    Not surprisingly the IPA gets a number of things wrong.

    firstly the worries about euro debt start a lot earlier than they allege.

    Secondly the $A is the commodity currency.

    the real and Rand as commodity currencies?
    the $C has other other qualities which takes it out.

    Thirdly if one examined the $A in the GFC you would find it falling against other currencies as well.
    It fell for example as much against the ringgit as against the $A.

    It goes like this.
    Strong growth means high demand for commodities and high prices which means little risk.$A goes up.

    Fears about growth means growth falling, demand for commodities falling and lower prices for commodities.
    Greater risk and much less demand for $A

    just think why the $A is the fifth traded currency.

    Lastly you have contradictory explanations going on here.

    the $A falls on RSPT which can only exist under strong world growth but fears about world growth which means fewer companies would actually pay the RSPT so the $A fall ‘due to the RSPT’ would unwind.

  71. “The RBA jacked the cash rate up a further 25 points in May and then signalled the pause that was always on the cards now the standard variable mortgage rate is at its decade average. The market was still pricing in a 5% cash rate by the end of the year. If you dount the Aussie’s status as a global risk asset check out the correlation with the S&P500.”

    Yet the AUD did not behave the way which normal pricing would indicate as it should – see how I broke up the sub sample.

    LO – yes there is an omitted variable bias. What matters is that I have pinned down the influences of certain dates.

    It is amazing to claim there is an omitted variable bias and attribute the entire focus of the depreciation onto the omitted variables.

    Those who say so are rewriting the demand for the AUD. You’re saying it correlates to global GDP expectations and that’s all that matters. To the point that it dominates all other effects – even short term effects.

  72. Butterfield, Bloomfiled & Bishop

    if you take the RBA figures then the $A against the $USs is 29/4 .9251, 30/4 .93 and 3/5 .925.
    of course we had debate on financing of Greek debt on 2/5.

    The problem is you cannot have the $A depreciating on the $A and then it doing the same on Debt problems.

    duh

  73. “of course we had debate on financing of Greek debt on 2/5.”

    You’re so full of it Homer. The Greeks aired their dirty laundry around 23 April, and the RPST was announced on the noght of the 2 May.

    You’re just making shit up as you go along.

  74. Butterfield, Bloomfiled & Bishop

    really

    to quote from the Times on 2/5

    Greece agreed a new package of austerity measures with the European Central Bank and the International Monetary Fund yesterday that cleared the way for the first financial rescue of a member of the 16-nation eurozone.

    Finance ministers meeting in Brussels last night endorsed the draft deal and agreed to provide a €110 billion (£96 billion) bailout loan, of which €80 billion would come from the eurozone member states and the rest from the IMF.

    your research skills are simply extraordinary

  75. Get a grip you schill:

    http://www.cnbc.com/id/36731305

    Futures Fall After Greece Asks for Aid
    Published: Friday, 23 Apr 2010 | 6:23 AM ET
    By: CNBC.com

    U.S. stock index futures turned slightly lower before the open Friday as the Greek Prime Minister requested aid from the International Monetary Fund and European Union.

  76. Butterfield, Bloomfiled & Bishop

    err Marky it was ongoing.

    There were doubts announced after every package announced etc.

    If the RSPT was a cause it would merely cause the $A from not APPRECIATING as much as it should have.

    If the $A is falling because of fears on world growth the RSPT becomes academic point.

    you cannot be worried about a RSPT if world growth is threatened in a major way.

    I am surprised well no I am not.

    The IPA does not understand what the term commodirty currency means.
    the IPAS has never heard of the carry trade.

  77. “it was ongoing”

    Yet at the same time you pin down an exact day for the crisis – which is after it started and conveniently when the RSPT was announced.

    This is just sheer duplicity.

  78. JC

    LO;

    You have Homer on your side. You must be right. lol

  79. Butterfield, Bloomfiled & Bishop

    err No Mark I am saying there was speculation about the Greek debt crisis on the same day.
    you merely missed this as your research skills let you down again.

    Never mind the inconsistency in saying the $A is falling because of the RSPT and also the Greek debt crisis.

    The fact the two are contradictory doesn’t matter!

  80. “err No Mark I am saying there was speculation about the Greek debt crisis on the same day.”

    News about the Greek crisis was known before that. The RSPT wasn’t. You assume the event was continuous and discrete. This is just sheer duplicity.

    “Never mind the inconsistency in saying the $A is falling because of the RSPT and also the Greek debt crisis.”

    No, the data says that the dollar rose in spite of the Greeks but fell due to the RSPT.

    Which infers the RSPT had a strong depreciative effect on the AUD.

  81. Butterfield, Bloomfiled & Bishop

    yeah Mark everything remained the same about the Greek debt crisis.
    you sound as stupid as Forrest.

    Two factors
    Strong world growth then the RSPT works and wella you get your effect.

    Greek debt crisis means lower world growth and the RSPT becomes academic.

    at best the RSPT can under your theory hold back some $A appreciation.

    Once expectations of world growth go pearshaped that completely unwinds.

    By the way ever thought about expectations of Aussie interest rates and commodity prices?

  82. “everything remained the same about the Greek debt crisis”

    Not what I said or I have contended with evidence.

    “By the way ever thought about expectations of Aussie interest rates and commodity prices?”

    The AUD rose realtive to the currency basket for a few days after this negative news. The damage had already been done. Look at the graph and the evidence and stop making things up as you go along.

  83. Butterfield, Bloomfiled & Bishop

    Making it up.
    have a look at the $A.
    It falls merely to the rate on the Monday it was on Thursday for your great effect.

    yeah.

  84. “have a look at the $A.
    It falls merely to the rate on the Monday it was on Thursday for your great effect.”

    No, you’re a liar and an idiot. My sample has 99 observations. You reason with 4. You’re the Lysenko of economics.

  85. Butterfield, Bloomfiled & Bishop

    Oh I see the announcement of the RSPT doesn’t affect the $A.

    It take days for this to happen

    what a complete idiot you are.

    do yourself a favour.
    you didn’t know what you were doing.
    you were told by someone who knows some of the mistakes you made.

    Try learning for once

  86. “Oh I see the announcement of the RSPT doesn’t affect the $A.”

    That’s not what I said. There was a very rapid drop and the dollar didn’t react to other causes as supporters of the RSPT said it did. The dollar continued to fall as more news about the RSPT came out and there was a flight of capital.

    This is evidenced by the the econometrics.

    Again, duplicity is your strong suit. You’re inferring there is a super strong, acid proofed cast iron EMH now.

    Next week, I can’t wait for you to call the EMH in all of it’s forms as crankery.

  87. “you didn’t know what you were doing.
    you were told by someone who knows some of the mistakes you made.”

    1. No.

    2. What mistakes, Lysenko?

  88. JC

    SRL:

    Homer’s right. The Super tax heist had the effect of appreciating the aussie. It caused it to go up.

    Just agree with him from now on.

  89. We could go along witht he crank to shut him up, but the data doesn’t lie.

  90. Butterfield, Bloomfiled & Bishop

    I am doing no more than pointing out to Marky what has been pointed out to him before.

    Marky got into this and went well lover his head.

    He has been told so but he continues on

    The effect on the RSPT just doesn’t occur on the day after the announcement.

    gosh when does it have an effect. christmas?

  91. “I am doing no more than pointing out what has been pointed out to him before.”

    Except the effect expected from the data did not occur and the estimated elasticities gainsay your theory.

    “got into this and went well lover his head”

    Gibberish.

    “The effect on the RSPT just doesn’t occur on the day after the announcement”

    From that time. Which I proved with highly statistically significant analysis – i.e beyond all doubt.

  92. JC

    You’re right Homer. It will have the effect around Xmas.

    Thanks Bye.

  93. sdfc

    SRL

    “broke up the sub-sample”?

    Just how do you think the Aussie should have reacted after the RBA meeting? There was no major change in rate hike expectations after the pause signal. It was to be expected.

    The budget came out on the 11th, the Aussie’s capitalation began several days later, when the global markets went into a tail-spin. It’s pretty clear cut the Aussie was following its usual pattern as a global risk barometer. The RSPT may have had a marginal effect but the main game was the evaporation in risk appetite and changing $A interest rate expectations.

  94. JC

    Edit time

    The RSPT may have had a marginal effect but the main game was the evaporation in risk appetite and changing $A interest rate expectations.

    Becomes:

    The RSPT may have had an enormous effect as the evaporation in risk appetite and changing $A interest rate expectations combined with a government adopting the Huggy Chavez Bolivarian revolution theory on foreign capital and a tax based on faulty assumptions caused the Aussie to collapse 14% in a very short period of time.

    Does that sound better?

  95. “The RSPT may have had a marginal effect but the main game was the evaporation in risk appetite and changing $A interest rate expectations.”

    No. There was a robust negative correlation with lagged VIX prices until the RSPT. From here on in, the relationship was weaker – the AUD decoupled to a degree from the VIX.

    Even if you were right sfdc, hell of a time to announce such a poorly designed and discriminatory tax, on exports to which our supply is large enough to affect global markets.

  96. sdfc

    No JC the Aussie acted as it always does when risk appetite goes to pot.

    I agree SRL the timing of the announcement was ina word stupid and I think calculated to bring forward a budget surplus to demonstrate the government’s economic creditentials ahead of the election. In other words typical Rudd populist bullshit.

    As for the design of the tax. I have a few problems with it. For starters those assets are Western Australian assets and the Fed’s can just fuck off as far as I’m concerned. The retrospectiveness (is that a word?) of the tax also a problem. I also have a problem with the tax kicking in at the govenment bond rate.

    I’ve gotta go, T’m being harrassed. Why can’t people just leave me alone.

  97. JC

    yea, Ok, SDFC, have it your way.

    The tax announcement helped to hold up the Aussie in the face of relentless selling, as the tax and what the two meat heads were saying about foreign capital was taken positively.

  98. sdfc

    Yeah that’s right JC that’s what I said.

  99. JC

    We’ll just hide the decline, SDFC.

  100. sdfc

    You’ve started babbling JC. When you have something worthwhile to say let me know.

  101. JC

    Hedge fund manager ends up owning an economics prof who has been peddling keynesian economics since the 90′s.

    Hugh Hendy is the best.

    http://www.youtube.com/watch?v=nuysYXlJ43I

  102. JC

    SDFC:
    In your own link he says he supports deficit spending. Is that Austrian economics? Lol.

    Dude. You’re not at you best today. Get some sleep.

  103. sdfc

    You didn’t read the article did you JC?

  104. JC

    Yea I did. Here:

    Deficit spending in a recession makes sense…

    That’s pretty Keynesian to me.

    Dude WTF are you doing? You’re now skulking around Scientific American to find articles that support your thesis.

    Scientific American for economics?

    Is this like reading Playboy for the politics?

    Anyways I’m off, I have to go read a piece about monetary economics in Delicious Magazine my wife recently bought.

    Get a grip SDFC.

  105. angie

    In relation to the Australian Resources Super Profits Tax and the wilful falsification of statistics by the Australian Federal Treasury in the Henry Review and the Treasurer’s media releases, I draw attention to the formal media release by the US researchers Markles and Shackelford, noting that their paper was misused, was used out of context, and does not support the conclusions claimed by Australia’s Federal Treasury.
    http://www.kenan-flagler.unc.edu/News/DetailsNewsPage.cfm?id=4767
    May 25, 2010
    “UNC Kenan-Flagler working paper debated in AustraliaA working academic paper by an accounting professor and a PhD student at the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School is generating a lot of political interest in Australia.Kevin S. Markle, who will soon graduate from UNC’s PhD program, and Douglas A. Shackelford, the Meade H. Willis Distinguished Professor of Taxation at UNC Kenan-Flagler, are authors of the working paper, “Do Multinationals or Domestic Firms Face Higher Effective Tax Rates?” A June 2009 draft of the paper is posted on the National Bureau of Economic Research web site at http://www.nber.org/papers/w15091 .
    Members of the media contacted Shackelford and Markle after an Australian Treasury review into the nation’s tax system cited figures from their academic paper during a policy debate.
    The paper’s usefulness in formulating policy for one sector in one country should not be overstated, said Shackelford in response to one reporter’s query. “The purpose of the paper is to collect all data about the corporate income taxes paid by all publicly traded firms worldwide and thus provide at a starting point for comparing one country with another.”
    “Our research has been pulled into a policy debate currently unfolding in Australia,” said Markle. “We have read accounts of how by both sides of the debate have referenced our paper and members of the media have contacted us asking for our reactions and comments.”
    “We stand behind our research,” Shackelford said. “However, it appears to us that a tiny element of a very large study has been taken out of context and that proper consideration has not been given to the methods used to derive the number, the intent of the study, and the limitations of the findings for informing specific policy debates.”
    To help resolve misunderstandings, the authors provided the following comments.
    The purpose of our paper is not to study specific industries in specific countries. Nor is it to precisely calculate rates of tax that are paid. Our paper is intended as a broad comparison of effective tax rates across countries. All numbers in the tables in the paper are appropriately interpreted on a relative – rather than absolute – basis.
    The version of the paper cited is a June 2009 draft posted on the National Bureau of Economic Research (NBER) website. This draft is a working paper and has been through no peer review. Posting on the NBER website is not equivalent to publication; it is a venue for in-process research to be circulated for the purpose of sharing ideas and garnering feedback. As with other academic papers on the NBER site, we are in the midst of additional revision before submitting it for publication in a peer-reviewed journal.
    The entire controversy appears to center around the numbers reported in the “Mining” column of Table 4 of our paper. That table reports the results of our estimations of our regression equation on observations grouped by 2-digit NAICS codes and is included in their paper as supplemental analysis to determine whether the cross-country differences we observe when all industries are grouped together exist at the industry level. The data are for 2003-2007. We make an arbitrary cut-off for reporting of 20 observations. Thus, it is possible that the numbers for Australia represent average numbers for as few as four companies over the five years. As such, we reach no conclusions nor make any comments about individual industries in individual countries. Our purpose in producing the table was to make relative comparisons only.
    The data used in our study are from the publicly available financial statements of firms. We do not have data from tax returns or any other proprietary data. In the June 2009 draft, the “tax rate” used was calculated as total tax expense divided by pre-tax income, both taken from the financial statements.
    Our study is of corporate income tax rates only. We do not consider royalties, fees, value-added tax or anything else that does not get included in the total tax expense line on the financial statements. This is a limitation of our study which is due to data availability and we acknowledge it in the paper.
    In the most recent draft of the paper (March 2010), we changed our data source because it enables us to address the questions of our study more effectively. In this version, we do not have sufficient observations to include a number for the mining industry in Australia. This is simply a function of the coverage of the two data providers. The underlying data used in the June 2009 are all publicly available. Anyone interested in replicating the results in that draft would have access to all of the data that we used.
    We have read the analysis of Professor Sinclair Davison posted at http://catallaxyfiles.com/ and do not disagree with his conclusions.
    It appears that people have assumed that the paper is authored by Mr. Markle because his name is listed first. That is incorrect. In our field, the default convention for co-authored work is for names to be listed alphabetically.
    This final point is technical in nature, but since it has been raised multiple times, we include it here.
    To derive the numbers that are causing the stir, here is a description of what we did. We will simplify it to assume there are just three countries in the study: Australia, Canada and the United States.
    Go to the database and collect all firms that have the needed financial statement information (total tax expense, pretax income, ETR between 0 and 70%) and have 21 as the first two digits of their NAICS number.
    We then run an ordinary least squares regression on a model that has ETR = f(AUSTRALIA, CANADA, US, year controls, size controls). (We are ignoring the domestic/multinational split, which is just an additional split but uses identical intuition.) The estimate of the coefficient on AUSTRALIA (which is simply an indicator variable =1 for all Australian observations) is reported as the “Australian ETR” (the 17% that folks are focused on).
    Note that a regression framework is used only because it allows us to test for statistical significance of coefficients and to control for factors such as size. The estimates that come out are really just conditional averages.
    If the goal were to analyze the real taxes paid by the mining sector in Australia, our approach would serve, at best, as a very preliminary and rough analysis. That is not a goal of our paper.
    Even when one fully grasps what is being captured by our methodology, there are several possible sources of error in our measurement that we are forced to accept. The simplest example is an error in the data – the firm reports 1,000 but the database entry is 100. The greatest concern in our context is that the database contains a zero tax expense when the correct number is something positive. We attempt to mitigate concerns by dropping outlier ETRs, but this is not a perfect control.
    These types of issues become much more important as the sample becomes smaller. When we are using our full sample, we have some assurance that the effect of such errors will not affect inferences. Down at the industry level, however, where the sample is much smaller, the threat is much larger.
    If we had intended our paper to provide definitive answers at the country-industry level, we would have tested the robustness of those results much more thoroughly.”

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