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As aggressive central bank intervention distorts global bond markets, currencies have become the most transparent indication of a nation's macroeconomic health. One currency – the Australian dollar – appears poised for a significant fall, and the country's resource-focused economy suggests the reverberations will be felt here in Canada.
This chart shows that the value of the Australian dollar has moved very much in step with Canadian mining stocks, reflecting the importance of commodity demand for both economies. (Unlike Canada, however, Australia is not a significant player in energy markets and its resource exposure is almost entirely in mining). More recently, the lines have diverged; the Australian dollar maintains a suspicious degree of strength, despite the declines in both prices and demand that have hit commodities, and as a result, Canadian mining stocks.
Credit Suisse global equity strategist Andrew Garthwaite believes that both the Aussie dollar, and that country's economy, are set for a major decline. Mr. Garthwaite notes that mining capital spending has climbed to an unsustainable 8 per cent of Australian gross domestic product, after averaging 3 per cent for many decades. In the third quarter of 2012, investment by mining companies accounted for an astounding 70 per cent of Australia GDP growth.
"[Mining] projects under consideration have already started to fall by 30 per cent per year … suggesting that by the end of 2013, mining capex should start to fall significantly," Mr. Garthwaite writes.
Recent multi-billion-dollar writedowns on mining assets by Rio Tinto and BHP Billiton support Mr. Garthwaite's outlook. The global mining boom is in its final innings and the need for more investment – in Australia or elsewhere – is questionable at best.
For Canadians, a sharp correction in the Australian dollar will merely verify the damage already done to domestic mining stocks. Global investors are likely to move away from hard asset-based currencies including the Canadian dollar in favour of the greenback or, although it seems unlikely now, the euro.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights and follow Scott on Twitter at @SBarlow_ROB.