Hedge Funds Savage Australian Dollar

By David Keane, 10/October/2008

On Monday 29/September, US Congress voted against a bill to bail out the US banks for the tune of US$700 billion. This unexpected vote caused immediate panic in global stock markets, and within a day the Dow Jones Industrial Average fell from 11,143 on 26/Sept to 10,365 on 29/Sept. This was the biggest ever one-day fall of the Dow Jones. After emergency meetings by both Republicans and Democrats, a week later the bill was passed, but the Dow Jones has remained jittery and has consistently lost ground, heading the US into almost certain recession, and probably bringing most global economies into recession with it.

What is of equal concern, is that Black Monday 29/September/2008, represents also the moment when the hedge funds began to focus upon the Australian dollar. The Australian dollar has been savaged on the global markets ever since. When the hedge funds choose to focus upon a specific economy, then the classic signs that we must look for are the synchronicity of a collapse of the global stock markets with the collapse of the national currency that the hedge funds are focussing upon.

Let us compare statistics for the fall in the Dow Jones, the global leading stock market indicator, together with the fall on the Australian dollar. Let us begin our statistics from 26/Sept, the Friday before the great collapse.

In the above chart, the exchange rate represents the value in US dollars we get in exchange for AUD$1.00. I have taken % comparisons with the Dow Jones and exchange rate figures for 26/September, just before the momentous global collapse.

Let us now look at these figures in a longer term perspective.

The Dow Jones Industrial Average had steadily been rising since the High Tech crash of 2001, peaking for an all time high of 14,164 on 9/October/2007, about a year ago. Ever since then, there has been serious concern about the strength of the US economy. The sub-prime mortgage bubble in the US was starting to become exposed, with the steady lack of confidence in the US economy, and steady depletion of the Dow Jones over the year. In the months Jul/08 to Sept/08, the Dow Jones had fallen below 12,000, hovering up and down between 11,000 and 12,000. That all changed on Black Monday, 29/September, and the Dow Jones has been in sharp fall ever since.

For the past several years, the Australian dollar has been gradually rising against the US dollar, reaching its highest exchange value against the US dollar on 15/July/2008, when an Australian dollar bought 98.0 US cents. Ever since 15/July/08, the Australian dollar has been in steady decline against the US dollar. Let us draw up a chart of recent exchange rates to examine the pattern of that steady decline.

The above chart shows how much an Australian dollar buys in terms of US $, Euro or yen. You will notice that during this period, both the US dollar and the Japanese yen have been very strong. The Euro is falling in value, about half the fall of the Australian dollar. It seems the hedge funds are also cutting down the Euro, but only half as savagely as they are cutting the Australian dollar. It is a surprise to me that the US dollar has remained so strong against international currencies, when the US stock market is collapsing.

It seems that since Black Monday 29/September/2008, a new and dangerous trend has become established in that the hedge funds are using the opportunity of the global stock market crash to savage the Australian dollar.

We recall the most recent high tech boom that crashed around the year 2000. Before then, all the economies of S E Asia had enjoyed the brand of tiger economies. But with the high tech crash, the hedge funds began to focus upon the S E Asian economies, causing them all to suffer severe meltdown. At that time Indonesia and the Philippines followed the advice of the IMF, with the result that the value of their national currencies crashed appallingly. Malaysia however, despite early following the same trend, decided to defy IMF recommendations and developed its own independent economic policy. As soon as that independent economic stance was adopted, the Malaysian economy stabilised, and has weathered the difficult period of the S E Asian economic meltdown.

Australia now has choices very similar to those faced by Malaysia on 2000. Do we proclaim as Kevin Rudd insists that Australia’s economy is based upon very firm foundations, and blindly follow the international recommendations led by the IMF?

I am concerned that in denying the gravity of the hedge fund crisis facing Australia, Kevin Rudd is blind to the opportunity to steer Australia in a new direction. Kevin Rudd affirms that Australia’s economic fundamentals are very sound. I dispute that statement. Australia’s economic fundamentals are rotten to the core. That core is the massive foreign debt facing Australia. From the Reserve Bank statistics published to June/08, Gross Foreign Debt for Australia has just recently matched the equivalent of the GNP of Australia.

But most of that Australian Foreign Debt is contracted in US dollars. In June 2008, the Australian dollar was still strong. It is only since after 15/July/08, that the Australian dollar started to fall. The publication of the Reserve Bank figures is always at least 3 months late. So we will not witness the effect of the fall of the Australian dollar in Reserve Bank figures until it is too late. At present the Australian dollar buys 68.6 US cents. This is a 30 cents fall from 15/July. As most foreign debts are contracted in US dollars, the actual Gross Foreign Debt for Australia is therefore likely to be about 130% of GNP. This compares with the most recently published Reserve Bank figures for June/2008 which shows the Gross National Debt as about 100% of GNP.

This is precisely the crisis that had impacted the previously very prosperous economies of Argentina and Indonesia. Within six months, the hedge funds had so savaged these national economies that the national Foreign Debt shifted from about 100% on the GNP to over 200% of GNP. The Foreign Debt became as a millstone around the necks of these countries. Because the countries could not service the interest of these colossal Foreign Debts, the national currencies of Argentina and Indonesia collapsed, and then they were reduced from First World status to Third World status, and placed under control of the IMF.

Some who have been predicting the US sub-prime mortgage crisis for many years, predict that as yet, only about one third of the sub-prime bad debts have yet been exposed. Following this logic along, the global stock market crash has only one third run its course. If this is true, then the recent hedge fund glut on the Australian economy is just at it beginning stage. Where will it end? Will Australia become humbled in similar manner to Argentina?

David Keane 

Download pdf version