Wayne Swan will announce the latest Australian budget today and it will involve a record budget deficit. Australia has been weathering the financial storm better than most and we, on these pages, had been vociferously arguing that the AUD was grossly undervalued against the USD at .65 and against the EUR at close to 2.0. Much of this undervaluation has now been undone and the AUD is approaching more equilibrium levels.
Australia was in a welcome position of having savings to spend in stimulating the economy but, in my opinion, much of this money was wasted on trying to keep over-inflated property prices up and by giving cash hand-outs rather than capital spending programs. Now the savings are gone and the government is starting to rack up deficits at an alarming rate. In a very open economy such as Australia, this is a worrying move.
Whilst the short-term technical and market pictures still favour the AUD, the fundamental picture may well soon start to paint a more bearish point of view. Another steep downturn in the Chinese economy and the AUD will turn south in a hurry, especially against the JPY.
