It’s difficult to see any economic setback in Australia without thinking about Canada. Both countries are commodity powerhouses, with strong connections to the Chinese economy; both countries have seen their currencies soar in recent years; and both are facing uncertainty in their banking sectors, with weakening housing activity.
So when Australia’s central bank cuts the country’s key interest rate to a record-low level – as it did overnight, nearly five years after the depths of the global financial crisis – and rumours circulate that billionaire investor George Soros has made a big bet against the Australian dollar, Canadians should sit up and take notice.
The quarter-point rate cut by the Reserve Bank of Australia, to 2.75 per cent, was unexpected. Most observers thought the central bank would hold steady at 3 per cent.
In a statement , the central bank pointed out that employment is growing at a slower pace than the labour force, investment in the resources sector has probably peaked and inflation is running lower than expected.
“The exchange rate, on the other hand, has been little changed at a historically high level over the past 18 months, which is unusual, given the decline in export prices and interest rates during that time,” the bank said.
Indeed, the strength of the Australian dollar could be attracting the attention of Mr. Soros. The Sydney Morning Herald reported that $1-billion (U.S.) worth of bets against the dollar were made in Hong Kong and Singapore on Monday night, and Soros Fund Management was the rumoured source.
Of course, this could be nothing more than a short-term bet on interest rates. But as the Herald pointed out, there are also longer-term issues facing the dollar: “The local and international factors that could see the Australian dollar fall towards parity include the level of industrial production in China, which affects commodity prices and Australian commodity export volumes.”
My colleague Scott Barlow argued on Tuesday morning that Australia’s economic growth is set to slow with declining growth in exports to China. That should put pressure on the currency. And Daniel Martin at Capital Economics expects the Reserve Bank of Australia will cut its key rate again before the end of the year.
The Bank of Canada is facing similar issues. It wasn’t long ago that most observers believed the bank would raise its key interest rate, which has been stuck at 1 per cent since 2010. The bank itself continues to warn that its next move is to raise the rate, but no one has a clear idea of when that could be given the relatively weak economic backdrop facing the economy now.
What’s interesting is that Canada and Australia were perceived as havens during the economic turmoil that followed the financial crisis of 2008 and 2009. Now, they’re both looking decidedly less upbeat as some of the world’s more troubled areas find their feet – the United States in particular, but to some extent the euro zone and Japan as well.
The stock market is reflecting this shift. The S&P 500 is up nearly 14 per cent this year, while Japan’s Nikkei 225 has risen more than 36 per cent and Germany’s DAX index has risen 7.5 per cent – mostly based on rising expectations for their respective economies. By comparison, Canada’s S&P/TSX composite index is almost flat for the year.
Curiously, Australia’s S&P/ASX 200 has performed remarkably well: It has risen 10.6 per cent in 2013 and it is up nearly 20 per cent over the past year, marking a striking divergence with Canada’s floundering benchmark index.
The two benchmark indexes have moved in lockstep over most of the past 10 years, so it is unlikely the relationship is about to end. The question now is whether strong Australian stocks are suggesting Canadian stocks should rise, or whether weak Canadian stocks are suggesting that Australian stocks should fall.