Global Financial Crisis bites hard in Europe, Asia & US
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The global financial crisis continues to bite hard around the world as more bad news is reported each day throughout Europe, US and Asia.
To give an idea how bad things are Wachovia, the big US bank unveiled a US $23.9 billion third quarter loss after writing down US $18.7 billion in goodwill and US $6.6 billion in credit losses.
Wachovia also projected an additional US $26.1 billion in mortgage related losses in 2009. Wachovia is currently preparing to be taken over by Wells Fargo.
Meanwhile, in Europe Hungary increased it’s interest rtes by 3 per cent to 11.5% to maintain it’s peg to the Euro currency. This is likely to continue throughout Eastern Europe to stem capital outflows.
This has followed heavy selling across currencies such as Russia, Turkey, India, Argentina etc. The currency sell-off has affected virtually every currency in the world including heavyweights the Yen, Euro and Pound as all currencies have depreciated against the USD.
The Yen carry-trade which has financed so much of the global investment binge has the hedge funds has started to be unwound as funds have deserted the Yen for the safety of the USD.
The contagion that is inflicting the world has definately impacted Australia with the sharemarket today hitting four year lows as the All Ordinaries fell under 4000 again. The AUD has also fallen heavily from near parity to below 65c since July.
It should be noted that while Australia has felt some pain it is nothing compared to some other countries around the world and it is hard to realise if most people realise still how lucky and insulated we have been.
At this stage it is up in the air how well Australia will survive in 2009. I suspect the bad times have only just begun should China not be able to quickly re-establish momentum in their economy.
AUD Currency continues to struggle
The Australian dollar continues to struggle today currently selling for 67c against the USD at the time of writing. The fall in the AUD has been dramatic after peaking around 97c in late July the AUD hit a low around 63c on last week.
The AUD fall has been dramatic and was not something envisaged in June or July when the USD was heavily under pressure and the AUD was looking like meeting parity to the USD.
How quick times change as the world economic crisis took hold and investors started heading for the exits the AUD was smashed. The Australian dollar has risen in recent years on the back the growing economic prosperity of Asia, in particular China which Australia has been a recipient of their amazing economic growth.
The mineral boom was a huge driver in what was seen as a miracle economy and the high interest rates on offer drove inflows into the AUD.
The question for most Australian’s is how far can the AUD go? This is not an easy question to answer as investors have become very negative towards the Australian economy and funds have flown into the safety of the USD.
The ongoing expectation of further rate cuts by the RBA continue to put pressure on the currency as further rate cuts over the remainder of 2008 have been built into money markets.
While a falling AUD is not good for Australian’s travelling overseas it could be seen as a boom for international tourists to our shores and also exporters. The only problem with this is travel is dramatically down around the world due to the economic crisis and consumers have cut back spending.
Next to rise will be consumer goods such as electrical equipment that has become as much as 30-40% cheaper due to the previously high AUD. With imports like to rise dramatically this will all put pressure on inflation.
The double whammy in 2009 could be rising inflation due to the falling AUD at the same time as falling domestic and global growth pushes the RBA to cut interest rates further which exacerbates the AUD fall as funds flow out of Australia.
It should be noted the RBA expect the inflation rate to fall but if it does not and inflation still hovers around 5% or even increases then Australia could be heading to a disastrous situation.
What do you think will happen in 2009? Share your thoughts through our comments section.