Happy Australia Day

By now, most new year’s resolutions would’ve well and truly gone up in smoke.

And if you’re the type who couldn’t give a rip about resolutions, I have something that might change your mind.

In any case, happy new year!

Recently, quite a few people have asked…

“Hey Suncow, why’s the Aussie $ falling?”

If you ask Google or ChatGPT, you’ll get some mind bending answer about supply and demand, which means nothing to John and Jenny out in the suburbs.

The good news is the dollar is pretty easy to understand…it’s all about buying stuff.

Put simply, when other countries buy stuff from us, the A$ goes up.

And when they don’t, the dollar weakens.

Let me give you an example….

In the early naughties (2000-2003) the A$ was trading around $0.50.

It was so weak it was nicknamed the Pacific Peso!

And then the mining boom took off because China was buying lots and lots of stuff from us (iron-ore and coal) the A$ shot up to parity ($1.00) for a couple of years.

In fact, at the peak of the mining boom the A$ reached $1.05!

Remember the ‘two-speed’ economy?

So now you’re probably wondering why the A$ has dropped nearly 10% in two months?

It’s simple. Trump’s tariffs.

Let me explain…

Trump loves tariffs more than he loved his time with Stormy Daniels.

And just like Stormy, tariffs can be very expensive!

Simply put, a tariff is a tax on imported goods.

However, tariffs are not paid by the country exporting (e.g. China) but instead the country importing (e.g. USA).

Specifically, businesses like Apple and Nike who import goods from China because it’s much cheaper are the ones who pay the tariffs, not the US government.

Therefore, the purpose of tariffs is to protect local industries and create an even playing field.

Tariffs (tax) are a good source of government revenue as well.

And to ‘Make America Great Again’, Trump wants to impose a blanket tariff of 10% to 20% on all imports, with additional tariffs of 60% to 100% on goods brought in from China.

But…every action has an equal and opposite reaction.

While tariffs help protect local industries, they also make imported goods more expensive.

And when those costs are passed on to consumers it creates another problem…

Hello, inflation!

But Trump thinks inflation and higher rates won’t be an issue.

(A bit like Stormy twenty years ago).

Instead, he believes tariffs will strengthen local industries and therefore strengthen the US$ (thus weaken the A$).

And he may be right.

However, the bond market (the world’s largest) has a different view.

The bond market is one of the most reliable indicators of where inflation and rates are headed, and since Trump’s election win, bond yields (rates) have shot up from 3.5% to a recent high of 4.8%.

Meaning, the bond market expects another wave of inflation.

Which means bond yields may go higher.

Now…remember what I said about buying stuff from other countries and pushing their dollar up?

If US bonds (which are like term deposits) look more attractive to overseas investors, guess what will happen?

That’s right, overseas investors will start buying stuff from the US in the form of bonds and push the US$ higher…and the A$ lower.

So what does all this mean for us good folk down under?

Firstly, the A$ is not weak and nor is our economy. We’ve just been caught up in the wash of Trump’s tariffs.

Secondly, if the A$ drops below $0.60, there’s no way the RBA will cut rates.

Reason – the RBA will keep rates higher for longer to make our stuff (like bonds and term deposits) attractive to overseas investors.

Thirdly, a lower A$ means imports will be more expensive. E.g. oil, imported fruit & veg, etc.

Consequently, ‘imported inflation’ is a threat.

So here’s my new year’s resolution on Australia Day.

Buy Australian made and help fight inflation!

Have a great weekend!

Adam

Back paddock – Australia is the only place where ‘yeah, nah’ is a full sentence.