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Pastimes : Clown-Free Zone... sorry, no clowns allowed -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (267251)	11/14/2003 9:49:01 AM
From: zonder	Read Replies (4) \| Respond to of 436258

Ready for inflation? The Producer Price Index, which measures prices paid to farms, factories and refineries, shot up 0.8 percent last month, the Labour Department said on Friday. reuters.co.uk. and... The Fed isn't altering its intention to keep interest rates low for many months, despite recent upbeat economic news. www.wsj.com

To: Knighty Tin who wrote (267251)	11/14/2003 9:54:18 AM
From: ild	Respond to of 436258

Did you also read this about AUD: Currencies: USD & AUD — Looking Beyond Current Account Deficits Stephen L. Jen & Melanie Baker (London) There has been much discussion of the need for the USD to crash/weaken significantly because of the large C/A deficit of the US, which was 4.9% in Q2 and could reach as high as 6.2% of GDP by 2004 according to our US economists —remaining at around record highs. This factor has helped the Australian dollar (AUD) appreciate 38.5% against the USD since January 2002. But Australia itself has a C/A deficit of 6.6% of GDP (Q2) — even larger than that of the US. The aim of this short note is not to argue that the AUD should also fall, but to make a point we’ve tried to make repeatedly, that exchange rates are driven by many factors, and a view on a currency built exclusively on the C/A deficit is not correct. A simple comparison between the US and Australia The US has been faulted for (1) its outsized C/A deficit and (2) its high household debt level. But the US stands up quite well on these metrics compared to Australia. First, as mentioned above, Australia’s C/A deficit is even larger than that of the US on the most recent data. Second, Australia’s household debt as a percentage of GDP is slightly higher than that of the US. Lessons from this comparison: 1. The C/A deficit isn’t everything The size of the external deficit is a very important factor for currencies. But we have to exercise care in arguing the “matter-of-fact” case that a large C/A deficit implies a currency crash. There are several aspects to this point. (1) The distinction between developing and developed nations. Countries with convertible currencies are given more leeway to run current-account deficits. Large C/A deficits in Asia were a key factor behind the Asia Currency Crisis, yet large and sustained US current-account deficits have not led to a dollar crash. (2) The USD’s hegemonic position. One of the key reasons why the Asian currencies were in a “crisis” was because most of the external debt was denominated in USDs, such that a run on local currencies quickly degenerated into a full-scale crash. We believe this will not happen to the USD, because most international debt owed by everyone else is also denominated in USDs. (3) The symbiotic relationship Asia has with the US. Deep inter-linkages between the two economies imply a large “dollar zone.” Hence looking at the US current-account deficit is a misnomer for the currency — we should consider the overall deficit of this wider zone. We have analysed this in previous notes, but stress that this is an important factor in cushioning the fall in the USD, in our view. 2. The Aussie is rather overvalued One problem with the USD correction that we’ve discussed before regards its symmetry. The asymmetric adjustment of the USD against EUR and JPY should be familiar. However, other currencies, like AUD and SEK, have also moved a long way. In fact, our valuation metrics suggest that the reasonable range of fair values for AUD/USD is 0.61–0.69. In fact, relative to our valuation ranges for seven key exchange rates (EUR/USD, USD/JPY, EUR/GBP, EUR/CHF, EUR/SEK, AUD/USD, and USD/CAD), AUD/USD is now farthest above the top of its valuation range. We are not saying that the Aussie will crash soon because of the C/A deficit or valuation. But we do believe the rally in the Aussie may slow down. Even though AUD is a “high beta” currency (one that tends to rally when the global economy recovers) and even though “the current account deficit isn’t everything,” the AUD faces two significant structural headwinds —C/A deficit and valuation. Bottom line A comparison of the US and Australian economies quickly underlines the idea that the current account deficit isn’t everything when it comes to currencies. We still think the USD will not crash and the AUD’s appreciation will slow.