For now, any thoughts of global financial markets settling down have been dashed as fears abound that troubles in the US and Europe will affect Asian economies and the demand for Australian commodity exports.
After starting the week at USD1.0345, the value of the Australian dollar slumped below parity to finish at USD0.9760 (see chart). In that same period, the dollar fell 6.29% against the Japanese Yen to finish at JPY74.45 and 3.09% against the Euro to come in at EUR0.7234.
Commodities were even more affected. The price of copper (30 day delivery) closed on Friday at $US3.27 per pound – down from almost $4.00 (see chart) not much more than one week ago. Zinc prices, sitting at almost $1.00 per just over a week ago, closed at less than $0.90.
Driving the volatility are concerns about the impact that the US and European debt crisis will have on Asian economies and the effect that, in turn, will have on demand for Australian commodities.
Last weekend, the International Monetary Fund (IMF) cautioned that if the US and Europe fall back into recession – a real possibility at this point – growth in Asia could be slashed by up to one third. Given that Australia’s four biggest export destinations (China, Japan, South Korea and India) are in Asia, that would have a serious impact for Australia.
In addition, concerns about oversupply of some commodities persist despite inventory levels having stabilised over recent months. According to Metalprices.com, current inventory levels of Zinc stand at above 800,000 MT – more than four times their level three years ago. Holdings of copper (around 470,000 MT) are well off their peak, but are still around two and a half times their level three years ago.
In the immediate term, the selloff may be overdone. With the notable exception of Japan, Asia is still expected to experience more than respectable levels of growth in the near term. Even in spite of its own warning, the IMF said last week in its World Economic Outlook that it expects growth across Asia to come in at 6.2% this year followed by 6.6 per cent in 2012. These figures are down on the 8.2% achieved last year, but they still represent healthy levels of growth. The result is that commodity demand from Asia will remain strong, albeit at a slightly lower level.
Also, expectations for the Australian economy itself remain sound. After sluggish growth of 1.8% this year, the IMF still expects Australia to grow by 3.3% next year. Moreover, forward looking indicators paint a subdued but hardly dire picture: The latest Westpac Leading Index, which tracks nine economic gauges and is considered a good indicator of economic prospects six to nine months in advance, increased by 0.5% in July. Against an expected drop of 0.1%, this was a pleasing outcome.
Furthermore, the IMF still expects global growth of a healthy 4.0% in both 2011 and 2012.
Still, the situation in Europe and America is serious. For America, the IMF expects growth of only 1.5% and 1.8% this year and next; for the Euro area, the figures are 1.6% and 1.1% respectively. Furthermore, both the US and Europe face the real prospect of a double dip recession. Moreover, as long as fears about bank and sovereign debt in Europe remain, investors will remain cautious and the outlook across the continent.
Volatility, it seems, is here to stay for now.