Wednesday, November 14, 2012

Australia's fundamentals continue to weaken; AUD should follow

Australian business surveys continue to show deteriorating sentiment across the board. Earlier we saw clear signs of flagging labor demand (see discussion). The recent NAB (National Australia Bank) survey showed that Australian businesses are becoming quite pessimistic.
The Australian: - An index of business conditions published by National Australia Bank fell two points to minus 5 points in October from September, the worst outcome since May 2009 when world financial markets were in crisis. Business confidence fell one point to minus 1 point.
A measure of capital spending fell to its lowest level since August 2009, underscoring a slowdown in business investment, especially in the once-booming mining sector, NAB said.

"The Australian economy appears to have stumbled into the fourth quarter," said Alan Oster, chief economist at NAB.

Source: DB

The components of the business conditions trend survey look weak across the board (sales, profitability, employment).

NAB business conditions and components (source: DB)

Another survey from AICD seems to support this trend.
The Sydney Morning Herald: - Australian directors are more pessimistic about business conditions now than they were two years ago, and still believe regulation and personal liability for directors is excessive.

The biggest challenges for businesses are national productivity, a lack of government investment in infrastructure – primarily roads, telecommunications, water supply and ports – and the high Australian dollar.

And the biggest hurdles to fixing these problems are general economic conditions, workplace laws, excessive regulation and skills shortages, according to a survey of 540 directors by the Australian Institute of Company Directors (AICD). Overall, the director sentiment index now sits at just 56.3 points, compared to 93.6 points at the start of 2011. A score of 100 is "neutral", while 200 would be "optimistic".

The directors' outlook for the Australian economy is dire, with 56 expecting growth over the next year to be weak or very weak. They expect the value of the Australian dollar, the official cash rate and wages growth to decline while unemployment rises.
That's why the decision by the RBA (Australia's central bank) to hold the overnight rate steady at their previous meeting seemed strange. Part of that decision was the central banks' surprise reduction in rates in October (the meeting before last), which likely put them into a wait-and-see mode. The combination of the latest rate decision and the Fed's monetary expansion has provided recent strength to the Australian dollar.

Source: Forexpros

The AUD's strength works against Australia's export oriented corporate sector, further weakening sentiment and investment. In the long run, the RBA will have to lower rates further, given the weakening fundamentals, ultimately taking rates to record low levels. And with that we should see a decline in the Australian dollar.
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