Why 2012 Could Bring the Needed Dip in the Aussie Dollar

President Obama got some good news yesterday morning: The U.S. unemployment rate fell to 8.5 percent from 8.7 percent. Imagine, though, the bragging rights he’d have if he could pull it down to Australia’s impressive number: 5.3 percent.

However, on Bloomberg this week I came across an article discussing a little-watched dynamic between Australia and China that on a greater scale could threaten that envious rate …

On Australia’s Gold Coast, a 22-mile-long stretch of beaches named Surfers Paradise and Rainbow Bay, Neil Rech opened a surf shop in December and unwittingly disturbed the peace.

His store, Sedition Surfboards, sells Chinese imports for $258, one-third the cost of some Australian-made boards that competitors are offering. Rival retailers averse to discounts and upset about local job losses questioned his patriotism, and even threatened violence, he said.

Chinese boards are machine made and thus require far less man-power. And thanks to constant improvements in technology, the performance and intricacies of machine-made boards now rival that of hand-shaped boards.

Here in the U.S., the “Buy American” mantra has gained a following over the last few years. And Congress has been juggling legislation that seeks to penalize China for their currency manipulation and sketchy trade practices. “We don’t want our jobs going overseas,” is the main gist of it all.

And neither do Australians.

To be sure, trade has been a boon for Australia and China; and the same could be said for the U.S./China trade relationship. But now that global growth trajectory is much shallower, the mood is turning bleak as shown by the drop in business confidence in the chart below.

Australia has made good on exporting natural resources to China. But that’s about where things stop. Jobs not related to mining/production of these resources sent to China have not fared well. For instance, have a look at steep slide in the number of manufacturing jobs since 2008:

Naturally, Australian consumer appetite has been hampered by the global economy just as other major economies have seen in their own consumers. And the growth in retail sales of consumer goods is struggling to recover:

But despite it all, the Australian dollar remains strong versus key currencies. And that’s putting further pressure on non-mining-related industries that seek to export or compete against imports.

Perhaps it makes sense to monitor Australia’s labor participation rate — the ratio between the labor force and the overall size of the nation’s population of the same age group. It is still high relative to the last three decades, but the recent sharp reversal could suggest economic growth may plateau or, worse, slump:

Now, back to global imbalances …

Current growth models have become exhausted, no matter whether you’re talking about the U.S., China or Australia. Australia may be in a decent position to stave off a recession; but some form of transition period will likely be necessary to balance out their reliance on the mining/resources sector.

Considering my still gloomy, if not gloomier, outlook for China and Europe, that transition period may be 2012.

It hopefully will be characterized by a leveling out of production costs and a shift in labor and capital. That means a less pricey exchange rate as well, which as shown in the chart below has been trending upward since mid-2008.

Australian dollar vs. U.S. dollar, weekly

For the long run such a transition would further bolster a relatively stable Australian economy, along with providing a needed dip in the value of their currency. And that’s why I’ve been recommending my World Currency Trader members stay on the short side of the Aussie dollar.

Best wishes,

Jack