Back in 1984, the sight of a Speedo-clad Paul Hogan was enough to get us all packing the zinc cream and heading for Australia. He’d ‘put a shrimp on the barbie’ and we all wanted a bite.
That six-year-long TV campaign, broadcast globally, led to an instant boom in tourism to Australia, which until then had been regarded by many as little more than ‘England with sun’ But 24 years later, the Australian tourism board might have to drag Hogan out again.
The Australian dollar, or ‘Aussie’, is rising sharply and it’s begun to put tourists off. It has already risen over 9% against the US dollar this year, and could reach parity by Christmas according to some analysts, as soaring commodity prices lift the currency to a 25-year high against the greenback. Coal prices are up 160% this year and iron ore by 80%, increases that have a major impact on the economy of the world’s largest exporter of coal and other key resources.
So far this year, there’s been a 7% drop in the number of British tourists going to Australia. And it looks like it could get worse. ‘The currency could very easily go to parity [with the US dollar] and beyond on the back of further commodity price inflation,’ said strategists at the Sydney office of Credit Suisse in a recent research note.
The rise in the Aussie can’t just be explained away by rising commodity prices though. As commodity prices have increased, so too has inflation, jumping to 4.4% in the first quarter. That’s outside the central bank’s 3% target. In response, the bank has increased interest rates twice in 2008 to a 12-year high of 7.25%. And that’s opened the door to a money-making scheme that last year we all thought was as good as dead.
Yes, the carry trade is alive and well and living in Australia. The world¹s currency speculators, hedge funds and Japanese housewives alike have started moving their borrowed Japanese yen into Australian dollars.
The credit crunch might have seen a contraction in the carry trade, with the Aussie falling to US$0.77 in the crunch’s wake last year. But it’s back with a vengeance, with the Aussie dollar now worth US$0.96 and looking destined to rise further as speculators borrow at 0.5% in Japan and invest in high-yielding Australian government bonds. That’s helping to drive the currency higher, which is bad news for export-led companies (excluding
miners) as well as tourism.
Meanwhile, 1400 miles over the Tasman Sea, New Zealand is getting over the worst effects of the worlds dalliance with its currency. Once a carry trade favourite, the Kiwi dollar is now getting pummelled as its economy contracts. With unemployment rising at its fastest pace since 1989, house prices falling and the country’s central bank contemplating a rate cut in order to give the flagging economy a boost, speculators have begun moving their money out of the Kiwi dollar. The Kiwi, down 3% this year against the US dollar, will fall another 17% in 2008, according to forecasts from Lehman Brothers, as the New Zealand central bank cuts the 8.25% interest rate by at least 1%.
We can’t think of much else the New Zealand central bank can do. But as long as they don’t goad Peter Jackson into a pair of nifty swimming trunks, they seem to be on the right course.