Australia faces two main problems economically that encompasses an magnitude of macro and micro economics issues.
The two main problems are China and a global sovereign debt crisis.
The current Australian government made a bet on fiscal stimulus, the bet was that the government would overinflated housing thus created an 'wealth effect' environment. This was achieved via tax deductions on stamp duty and first home owners grants that at one point totals $30,000.00+. The theory is simple, keep people spending via the wealth effect and housing equity; maintain consumption and stabilize unemployment, it was successful on a short term but requires to China continue high octane growth (on the short term,). The government could then tax the country's high earning industries (mining), with a suggested tax amount at 40%, this would then alleviate any required taxes from the consumers, property would level out, consumption would be maintained and the government would then attempt to edge back into surplus.
A fatal bet, one that is doomed to fail.
The Reserve Bank of Australia caught a whiff of inflation from housing and started a rate tightening cycle, that has ended leaving a yield on the AUD at 4.50%.
As discussed in Prepare yourself (and your portfolio) for a coming debt crisis and a Chinese hard-landing (crash) 2010 - (update 16) iron ore shipments to china are slowing (April 2010), prices are high and China are now using it' huge surplus of iron ore as a fall-back to paying higher spot prices. The government 40% tax on miners may misfire, as the miners profits are about to be squeezed in the next 6mths.
The other major issue facing Australia, apart from a China slow down, credit market funding costs and interbank funding costs are blowing out. Note the LIBOR from Retuters: "Extending recent gains, the three-month euro London interbank offered rate reached 0.65 percent EUR3MFSR the highest since early January daily fixings from the British Bankers' Association showed." This is indicative of the interbank markets are now showing stress and asking for more % yield on the money markets, particularly in Europe. From Dow Jones in relation to CDS spreads widening on corporate grade debt "LONDON (Dow Jones)--European corporate and sovereign credit default swap indexes failed to consolidate early gains Tuesday, as persistent concerns on sovereign debt and the global recovery hit financial markets again and pushed the cost of default insurance back up. At 1025 GMT, the iTraxx Europe index, which measures the cost of insuring the debt of 125 investment grade European corporate borrowers, was four basis points wider from Monday's close, at 139/140 basis points, according to Markit."
The above points relating to LIBOR rates and CDS spreads is that the costs for holding debt and lending on risk are increasing, this is passed onto the consumer via real interest rates on credit and eventually if we get a return to 2008 levels where the credit markets freeze up again, credit is then unavailable to business/corporate high risk/consumers etc.
So the central banks may have no alternative but to allow the markets to devalue currencies, I suspect this will happen to EURO. But high yield currencies like the (Brazil) REAL, (Canada) CAD and the AUD should come under intense selling pressure once the full extent on a China property/economy slow down and a Europe bank crisis reveals it's self to the market.
But in the meantime CB's will try and manage a sell off of currencies rather than a panic sell. This is done by talking up monetary measures to support currencies, then they will indicate that they see their currencies go lower. The ECB have been doing this for weeks now. It is pitiful and I suspect once a bank/s writedown's start to filter through to the market some larger sells should take place.
At this point the market will be setting up large positions to sell the AUD after buying into 0.82 and 0.81 ranges.
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