Reserve Bank of Lilliput

Delusional Economics does a nice hatchet job on comments by RBA boffin Luci Ellis about the housing bubble. Sadly, however, there is more to dismember on the currency front.

From Business Day:

Reserve Bank of Australia (RBA) Head of Financial Stability Luci Ellis says the poor strength of the US dollar is no surprise, given the weak US economy and labour market.

"The US economy is in a terrible state," she said during an address to CPA Australia conference in Brisbane.

"There's a question of whether the Australian dollar is high or the US dollar is low."

But Dr Ellis predicted once the US started to recover, the Aussie dollar's strength against the Greenback would weaken.

"Once things start to pick up and their dollar starts to recover, once their wages pick up again, that's part of the transition mechanism and part of the adjustment," she said.

"So I think you'll see that temporary boost will presumably dissipate."

See the above chart. It is four currnecies priced in $US. Each one is different. The Euro is a manufacturing currency. Stirling is a financial currency. And, like the Aussie Battler, the Peso is a commodities currency. Does it look like the Aussie has moonshot past all three (and just about any other currency you can name) just because the $US is falling?

Moreover, the idea that the $US will recover when their economy does is completely backwards. The US's only hope of finding a new source of demand for its grossly under-utilised economy is a weak dollar. Clearly The US Fed understands that, which is why it's about to resume printing money like lolly wrappers. So too does the US Treasury, and the economic boffins in the White house, all of whom have said the US must export more to recover.

Pretty much every other central bank in the world understands it too, which is why they're all embarked on the greatest race to the bottom since the Great Depression.

The Chinese understand it, which is why they're so attached to the peg, as they ride the dollar lower at everyone's expense.

The gold market understands it too as it rockets toward $1500.

The Aussie Battler is ripping because Australia is a risk proxy for the global reflation story around China and commodities. And because of the carry trade on interest rates. It is not some passive and momentary phenomenon. It is a symptom of everything that remains wrong with global markets. They run and run on momentum and then suddenly reverse when spooked.

And that is when the $US will recover, when the shit hits the fan again.