Australia Focus : Recession Proof


The Australian dollar has had a slammed and dunked week again making it the 3rd worst performing currency in the entire world for the month of September, losing 6.08% against the USD and greatly underperforming countries like Namibia, Swaziland and Lesotho, not to mention Ghana, Mauritania and Surinam.

Indeed, the Australian dollar has lost nearly 20% against the Ghanaian Cedi which is good news for Ghanaians.


Some market moving events

How quickly our bankers are to change their minds. I was surprised to read that a private bank is now sending pieces titled “The trapdoor opens” for the AUD and how they expect the currency to collapse even more in the days ahead on worries over the Chinese property market and weaker commodity prices when just 2 months ago their call was for a stronger AUD with targets of up to 1.00 for the AUDUSD and the same worries had already surfaced then.

Time for some perspective.

An amazing fact – Australia has not been in a recession since the early 90’s.

Nearly every major economy skirted with technical recessions ( 2 consecutive quarters of negative GDP growth) during the Global Financial Crisis back in 2008 when Lehman Brothers collapsed and caused havoc in financial markets which impacted the economies of every single country in the world.

During that period back in 2008-2009, even China’s growth engine stalled for their GDP to dip briefly under the 7% handle back in 1Q09. Malaysia, Singapore, Thailand, Taiwan and Hong Kong all bore through several quarters of negative growth and Singapore was lucky to have the casino come in Feb 2010 to save the country.

Australia, Korea along with China, Philippines and India were spared.

Is Australia is recession proof ? and how did they managed to avoid the Asia Financial Crisis of 97 and the dot com bust following ?

australian gdp qoqChart : Australia Quarterly GDP % Growth

Well, they have always had high interest rates and that is a good buffer enough. The RBA cash target rate of 2.5% is higher than every single developed market except for New Zealand. And Australia has higher cash rates than many emerging market countries, all of Eastern Europe except for Ukraine, Turkey, Russia and Kazakhstan.

Take a look at the chart below which plots the RBA Cash Rate with CPI (inflation), GDP and I threw in population growth for good measure because that population dog-leg up in the next 2 years is going to be good for the economy.


The cuts in the Cash Rate back in the late 90’s allowed GDP to rebound quickly and we note that CPI is always kept in check and for the first time, we have CPI outpacing the Cash Rate which is good because Japan and Europe would love to have some of that chasing for inflation in their own economies.

Another interesting paper that has just been published by the RBA is that exchange rate shocks of temporary increases in the exchange rate that is unrelated to trade would tend to decrease GDP and inflation although they did not consider the case of a exchange rate collapse that Dr Doom Roubini is forecasting at 0.75 for the AUDUSD.

I did some correlation tables and found that the AUDUSD is negatively correlated to GDP which more or less implies that a weaker AUDUSD is good for the GDP.

Voila. Recession proof.


Australian bonds had a good run last week, running up 0.13-0.26% ! A remarkable run.

The 4 year is a sweet spot, like for the USD curve. 3.25% for 4 years AUD compared to 1.68% for the USD. [compared to US 10Y at 2.66% and AUD at 3.89%]

Still bullish !


I read a rumour mongering report that the AUD has much more room to decline if last year’s extreme market positioning is assumed and I think I am going to frame it up to review in the next 2 months.

Yet. No one is going to be buying the AUDUSD now because of the pain of the last fortnight. I am bullish AUDCAD because no one is harping about the Canadian miners going broke and the US net imports is crashing.  Still target 0.99.

Lots of calls to sell the EURAUD ahead of the ECB on 2 Oct, but my opinion is – WHY IS IT STILL HIGHER ?

Yet, do note that the AUDSGD is nearing the 5 year low set in Jan this year of 1.1094. For all the OZ properties Singaporeans have invested in, DO SOMETHING !

The best thing I can do is to declare that, as far as I can see, Australia is pretty recession proof (remember they added 121k jobs last month !).  And mining companies are turning to cattle ranching and Australia will always have something that the world needs that is finite and limited in supply.

Leaving you with the prices and also a finding that Pimco’s Bill Gross does not have a lot of AUD bonds in his portfolio, so rest assured about the bonds too.

aud bonds