The Experts

Joanne Masters
+ About Joanne Masters

Jo Masters has 14 years of investment banking experience in Australia, with a focus on economic research and currency strategy.

Having completed a Master of Economics, Jo began her career at Macquarie Bank, initially in the Economics Team providing economic and financial market analysis and advice to clients and traders. She covered the major economies, Australia and New Zealand, as well as being integrally involved in setting up the Asian research base.

In 1999, Jo was asked to join the Foreign Exchange Division in the newly created role of Currency Strategist where she focused on G7 and commodity currencies providing written and verbal advice. In 2001 she joined the Corporate Sales Team specialising in wholesale institutional trading with clients including AMP, State Street, ING and the Reserve Bank of Australia. Jo regularly appeared as an expert commentator on CNBC, Bloomberg, Sky and various newswires.

Jo is currently working as a freelance financial writer, with a keen interest in currency markets.

Sometimes it's enough to be the best of a bad currency lot

Tuesday, January 20, 2015

By Jo Masters

After a turbulent few months, the Australian dollar finished 2014 at US82 cents, a fall of over US7 cents in the year. A weaker Australian dollar was widely expected, although the timing and speed of the depreciation saw some scramble to re-position.

You do not need to look too far, or dig too deep, to find solid reasons why the Australian dollar is weaker. Most obviously, commodity prices - which remain a key factor in fundamental assessments of the local currency – have fallen sharply. Iron ore, oil and copper are all down at five-plus year lows. 


Source: Yahoo Finance

In addition, despite the most recent employment numbers, the risks around the domestic economic outlook have shifted to the downside. The key challenge for the Australian economy has – and will continue to be – the shift away from resources towards more traditional drivers of growth. 

On the one hand, the commodity sector has weakened faster and harder than expected. And on the other, consumer and business spending has failed to pick up as fast as expected. Housing is a bright spot, although the latest building approvals and housing finance data suggest this sector may have come off the boil. The economy expanded at just 2.7% in the year to September, and inflation expectations have slipped to five-year lows. 

Several economists are now expecting the RBA to ease monetary policy, with one to two rate cuts by mid-year. Futures markets are pricing in a 70% chance of a rate cut by April, and 100% chance of one by June.

Against this backdrop, it is no wonder the Australian dollar has weakened. However, the downward momentum is likely to ease up over the first half of 2015. That is not to say the Australian dollar won’t go lower, but that the pace of downward momentum is likely to moderate, particularly as speculative longs have already been washed out. 

Traditional ‘fair value’ models for the Australian dollar - which incorporate commodity prices, interest rate differentials and the current account – suggest ‘fair value’ is around US80 cents. Obviously, the more commodity prices fall, and the more interest rate differentials with the US narrow, the lower this number will be. 

One key support for the local currency – and one that will limit downside in the coming six months – remains the fact that the local cash rate is one of the highest among advanced economies (see table). 

While the differential against US interest rates will narrow – and faster than many had thought as domestic views shift toward rate cuts from the RBA – the reality is investors still have to pay to be ‘short Australian dollar’. Even if the RBA cut the domestic cash rate to 2%, it’ll take the Fed a good while to catch up. 

Moreover, there aren’t too many currencies that look like a better buy than the Australian dollar. Sometimes you don’t need to be a stand-out, just the best of a bad lot. The US dollar is the stand-out for this year, although most are already positioned for further US dollar strength.  Kiwi rates make the NZ dollar attractive too, and perhaps if you need exposure to Europe then STG (the British pound) is the currency of choice. But that’s about it amongst the majors. 

The euro will battle ongoing concerns about the economy, and more importantly, the commencement of quantitative easing by the European Central Bank (ECB). The US dollar is a great example of the impact that quantitative easing programs have on currencies. And, some believe that last week’s shock move by the Swiss National Bank is a sign that the ECB may undertake a larger than expected easing program. Meanwhile, the Japanese economy is faring little better. 

So, with long positions already cleared out in the Australian dollar, the local currency should find some breathing space in coming months. In the near term, look for the Australian dollar to find support ahead of 0.80 (particularly if commodity prices continue to show signs of greater stability). Looking toward the middle of 2015, look for the Australian dollar to move toward 0.77. More broadly, the Australian dollar should fare well on some of the cross-rates, particularly against the euro and yen.


How low can the Aussie dollar go?

Wednesday, December 10, 2014

By Joanne Masters

Financial markets are often described as ‘dynamic’ and ‘exciting’ and the past month or so has shown just why.  Significant moves across asset classes, volatility, sharp shifts in positioning and headline grabbing news – its all been there.

Currency markets are no exception. We’ve seen significant falls across currencies, with the Japanese Yen at a seven-year low, the Aussie fall to four-year lows, the Euro to two-year lows and multi month lows on the NZ dollar and the Pound.

US outlook rosy

The overwhelming story is improving confidence about America’s economic prospects, and along with that, the prospect that the US Federal Reserve starts to raise interest rates next year.

This story has been gaining momentum, and was given another shot in the arm last week with November payrolls data. The data revealed a staggering 321,000 new jobs were created in November, smashing economists’ forecasts and up from a positively revised 243,000 new jobs the previous months. Unemployment was steady at 5.8% and, encouragingly for policymakers, average hourly earnings rose 0.4% in the month, double expectations.

The US is on track for the best year of jobs growth in 15 years, and latest growth forecasts from the well-respected National Association of Business Economists show economic growth accelerating to 3.1% in 2015, up from 2.2% this year.

In addition to a broad-based rally by the US dollar, US yields have also risen as investors have become increasingly confident the US Fed will raise rates in the first half of 2015. Financial market participants will be looking closely at the statement from the FOMC on 16-17 December for any hints that rate hikes could be sooner rather than later. The US dollar will get another boost if the FOMC alters its long held statement that maintaining current interest rate settings will be appropriate for “a considerable time”.

Everywhere else

In contrast, the economic picture in Japan and Europe remains worrisome. The Bank of Japan surprised financial markets at the end of October with its decision to flood the market with cash to counter deflationary pressures. Meanwhile with economic growth in the European Union slowing to an annual rate of just 0.8% in the September quarter, the ECB is reported to be considering an asset purchase program of Euro 1,000 billion.

Against this international backdrop, and with commodity prices plunging, its little wonder that the Aussie is under pressure! Indeed, the Aussie dollar has not just slipped against the resurging US dollar, but has loss ground against the Euro, the Pound, the NZ dollar and has only held steady against the collapsing Yen.

On commodity prices, it’s enough to say that both iron ore and oil are sitting at five-year lows. And the adjustment has been quick, with iron ore prices nearly halving in a year. This is hitting Australian equities, state and federal budgets, the economy and confidence.  Indeed, recent national accounts data showed that the economy expanded by just 0.3% in the September quarter (missing forecasts of 0.7%) and resulting in annual growth of 2.7%.

Rate cut possibilities

If that is not enough to hurt the Aussie, talk has turned to the prospect of a rate cut from the RBA next year.  Indeed, financial markets are now pricing in a 60% chance of a 25 basis point rate cut next year, possibly as early as February. Several economists are now on board with this view, with one domestic bank looking for consecutive 25 basis point rate cuts in February and March, which would take the local cash rate to 2%.

And as if this trifecta – of a strengthening US dollar, plunging commodity prices, and talk of local rate cuts – is not enough, market risk and volatility are also weighing on our ‘fair weather’ currency.  At the margin, so is the recommendation from David Murray’s Financial System Inquiry that Australia’s big four banks need to increase their capital holdings to protect themselves from a future financial crisis.

It is difficult to see the Aussie dollar garnering much support any time soon. With trading volumes likely to decline in to the holiday period, investors will be cautious about holding risky positions. The technicals are bearish, the fundamentals poor. I am looking for the Aussie dollar to find support above 0.80 over the remainder of this year, at least while domestic interest rate expectations firm up.

With deteriorating fundamentals, how low can it go? Well, with the Aussie still paying coupon, it’s hard to see a re-run of the rout that hit in 2009. Fair value models suggest that the Aussie dollar should be around 0.77. Certainly that is possible – even probable – but I think that is a level for 2015.

Source: Yahoo Finance

Follow Joanne on Twitter at @masters_joanne


It's all about the carry for the Aussie

Thursday, November 20, 2014

By Joanne Masters

The tendency in popular press is to focus on the Aussie dollar against the US dollar. Certainly, there’s been plenty to write about as the US dollar has strengthened in recent weeks, taking the Aussie dollar from a comfortable 0.92-0.94 to settle somewhere around 0.87.

However, there is another interesting story and that is the Australian dollar against the Japanese Yen. While the Aussie dollar is under pressures against the greenback, fairly steady against the euro, NZ dollar and pound, it has soared against the yen in the past month, hitting seven years high this week. And, let’s not forget, that Japan remains an important trading partner (particularly for commodities) with annual trade over $70 billion a year.


Source: Yahoo

Given the Aussie’s steady performance on most cross rates, this is mostly a Yen story. It’s no surprise that the Yen is under pressure. September quarter GDP earlier this week highlighted just how weak the Japanese economy is, with growth down an annualized 1.6% in Q3, following a 7.3% fall the previous quarter. 

At the same time, inflation slowed to 1%, the lowest in nearly a year (well below the central bank’s target of 2%) and job creation weakened for the first time in over three years.

Meanwhile, the Bank of Japan continues its battle to boost inflation expectations and support economic recovery. Last Friday, the BOJ surprised financial markets by expanding its already aggressive campaign of yearly asset purchases.

The dire state of the economy has seen PM Abe delay the second scheduled increase in consumption taxes and announce he will dissolve parliament this week and hold a snap election next month.

By contrast, RBA Governor Stevens addressed CEDA this week. To offset the weakening mining sector, the RBA sees stronger non-mining activity, improving productivity, rising household wealth and strong housing activity.

While Stevens gave a clear indication that interest rates rises are not on the immediate horizon, it is important to remember that Australia still sports one of the highest cash rates amongst advanced economies. And that is not going to be threatened any time soon.

While the Fed is widely expected to commence a tightening cycle in mid 2015, US rates have a long way to catch up. Same for the UK. Meanwhile, Japan and Europe are both desperately trying to jumpstart their economies. This leaves the Aussie dollar and NZ dollar as coupon stand-outs in a world still awash with liquidity. Carry, anyone?  




Don’t forget the chase for yield

Wednesday, October 15, 2014

by Joanne Masters

Financial markets have woken from their slumber, with the past month or so seeing dramatic moves across currencies, equities and bonds. The Northern Hemisphere is back from summer holidays, economic data has offered some surprises and thoughts are turning to what 2015 could bring.

The Aussie dollar has not escaped the volatility, falling over US 7 cents since early September to flirt with January’s low of US 86.60. Renewed price action and volatility stand in contrast to the preceding months, where the Aussie stuck firmly in a tight range, despite shifting economic fundamentals. Meanwhile, the Australian share market has fallen nearly 10 per cent.


Many economists and analysts had been calling for a weaker Australian dollar for some time (although the speed and timing of the move may have caught many by surprise). You don’t have to look too hard to find reasons to be ‘bearish’ about the Aussie. After all, commodity prices are under pressure, growth in our key trading partner is slowing, the Reserve Bank of Australia (RBA) is firmly on hold and geopolitical risks are heightened on a variety of fronts.

Global prices for iron ore – our largest export – have fallen 40 per cent, with further downside likely, as major producers flood the market with supply. Meanwhile, news that China will impose tariffs on coal has added to the sombre outlook.

Locally, the economy is still struggling to transfer from mining-led to domestically driven growth. The RBA is widely expected to maintain current interest rate settings until 2016, but arguably the risks have accumulated to the downside over the past month. Indeed, the labour market has disappointed, with the unemployment rate up and wages growth weaker than expected. Meanwhile, the expected fiscal drag on the economy could be larger than forecast, given slower than forecast wages growth, lower iron ore prices and higher than planned military expenditure.

The key story in currency markets, however, remains the US dollar. Indeed, the Aussie dollar has ignored this background fundamental story for much of 2014.

There’s no doubt that sentiment has turned in favour of the US dollar as the Fed’s quantitative easing program draws to an end and the market can sense the proximity of US rate hikes.

Selling US dollars against almost any other currency is no longer attractive, particularly as financial markets are reminded of the significant risks and challenges to the economic outlook for both Europe and Japan.

All this said, it’s unlikely to be a smooth recovery path for the US dollar or a steady decline for the Aussie. Volatility has risen, positioning has squared up, geopolitical risks abound and adjustments are rarely orderly and streamlined.

Indeed, market confidence in America’s economic recovery (and the timing of rate hikes) wavered after the release of the minutes from the latest Fed meeting, which expressed some concern about the impact of a slowing global economy and stronger US dollar on the US recovery. This has seen US 10-year yields slip from 2.65 per cent back to 2.30 per cent, and with US equities also under pressure, has temporarily taken the gloss off the US dollar.

Equally, while the Aussie may be under pressure from a stronger US dollar, commodity prices, concerns about elements of the local economy, and risk aversion, it remains supported by ‘yield chase’.

The world is still awash with liquidity and the Aussie dollar remains a standout on yields. Even as the Fed commences rate hikes, the Aussie (as well as NZ dollar and Sterling) will continue to offer sound relative returns – particularly with Europe and Japan expected to maintain zero interest rates for a long time to come.

Coming months will continue to be a story of US dollar strength, although there will be periods of range trading, periods of volatility and periods of sharp moves depending on economic data, on sentiment and on positioning.

Against this backdrop, however, look for the ‘coupon story’ to provide some relative support for the ‘yielders’, specifically the Aussie, NZ dollar and Sterling. It will be easiest to hold long US dollar positions against the Japanese yen, Euro and Swiss franc.

With positions cleared out, and the US reporting season on the doorstep, currency markets are likely to take a breather, with the Aussie likely to establish a range of 0.85-0.90 for coming months.


Reality hits the $A

Monday, September 29, 2014

The Australian dollar has frustrated analysts and traders alike this year, stubbornly holding above 0.90 despite sharp falls in key commodity prices, an improving US economy, and heightened geopolitical risk. Indeed, many market players were left wondering if the $A was eschewing its long held relationship with commodity prices.

However, in mid-September, the pace shifted and there was some action under-foot. In the past two weeks, the $A has fallen from 0.94, to 7 month lows below 88 cents (see chart).

Source: Yahoo Finance

Why have currency investors suddenly decided to respond to deteriorating fundamentals?

In part, the fundamental story has weakened further. Further, significant falls in key commodity have made the commodity story difficult to ignore. In particular, iron ore – Australia’s largest export – has been stealing the limelight, with spot prices now below US$80 per tonne, the lowest since 2009 and down 41% year to date. The sharply weaker price reflects both softening demand from China and a flood of supply from key miners.

Meanwhile, the $US has finally gained some traction, recording broad-based gains in recent weeks. Remember currency markets are always a tale of two currencies, and without doubt part of the $A weakenss reflects USD strength.

The stronger $US has been underpinned by confirmation from the US Federal Reserve that it will wind up its historic quantitiatve easing program next month. This has provided financial markets with confidence that the economic recovery is now solid enough to absorb the tightening of this credit channel.

While Fed rate hikes remain a 2015 story, financial markets are increasingly confident that the ground is being laid. Meanwhile, US yields have finally started to rise, with the US 10-year convincingly clearing 2.5%.

In a world awash with liquidity, with Europe and Japan fighting our recession/deflationary cycles, the US looks like a solid investment bet. And heightened geopolitical risk is adding to the mix.

Global liquidity has supported the $A in the face of lower commodity prices.  The local currency has certainly benefitted its position as ‘high yield, low risk’ currency. However, sentiment has turned on the $A, and it is noteworthy that the $A has not just weakened against the US$ but also on key cross rates.

The most recent leg down in the local currency came on the back of comments from Reserve Bank of New Zealand Governor Wheeler, who warned “We expect a significant further depreciation of the exchange rate … past experience suggests that when the New Zealand dollar begins depreciating from an unjustified and unsustainable level, the ultimate adjustment can be large."

The RBA will be pleased to see the recent softening of the local currency – it is an appropriate economic response to weakening commodity prices and mining investment.

The final part of the puzzle, however, has nothing to do with economics or fundamentals. It is about markets – positioning and momentum. Recent downward momentum has finally vindicated those that held ‘short’ positions with clenched teeth as the currency did nothing. And now, any $A rally will be met by those few holding long positions wanting to offload them, and those needing to add to shorts. It’ll be hard for the $A to break back above 0.90 in this environment.

Where does the $A head now?

Lower is the answer, but how low and how quickly remains harder to predict. Economists have been looking for the $A to end this year at 0.87 and that now looks very reasonable.

Much depends on the USD and signals about the strength of the economic recovery and timing of eventual Fed rate hikes, as well as China and the impact on demand for Australia’s commodities. This year's low of 0.8660 looks likely to come in to play in coming weeks, and I see the local currency closing the year around 0.82-0.85.


Why isn’t the A$ falling?

Monday, July 28, 2014

by Joanne Masters

There is an almost universal expectation that the A$ should be weakening, with many forecasters looking for the local unit to slip below 0.90 against the US$. A lower A$ seems likely given a modest global outlook, moderating commodity prices and a strengthening US$.

Despite this backdrop, in the last month the A$ briefly pushed above 0.95, before settling in a tight 0.9350-0.9450 range. And just as the A$ hasn’t weakened as expected, neither has the US$ strengthened as expected (partly reflecting the reluctance of US bond yields to rise). 

While this may be annoying for economists and traders, it has been frustrating for policymakers; who have been hoping for a weaker A$ to offset some of the fiscal tightening put in place by the Federal Budget and to provide some support to the export industry as it adjusts to a less robust commodity market. Indeed, in early July, RBA Governor Stevens commented that the A$ is over-valued “and not just by a few cents” and the minutes from the July RBA Board meeting noted that the A$ is up 8% on a trade-weighted basis this year despite lower prices for bulk commodities. 

So, why isn’t the A$ following the script and weakening? 

At present, there is a strong consensus about the broad fundamentals. Commodity prices are moderating. The domestic economy is adjusting to a less robust commodity market but humming along much as anticipated. The US economy is recovering broadly as expected and the Fed continues to taper its quantitative easing program.

All of this is priced in to financial markets, and there has been little new direction to provide price impetus to currencies. 

The stickiness present in the A$ is largely a reflection of timing – both the reality that several key factors pointing to a weaker A$ are unlikely to come to fruition in the near term (or even this year), and the associated uncertainty with forecasting something 12-18 months in the future. 

This is particularly the case with interest rate differentials – a key component in forecasting the A$. 

First, monetary policy settings in Australia are expected to remain on hold well until late 2015 / early 2016. 

Second, while the Fed is expected to wind down its asset purchase program by the end of this year, a move to raise the Fed funds rate is unlikely before mid to late 2015. [This weeks FOMC does not include any forecast updates or associated press briefings, and is widely expected to reaffirm prevailing views]. 

This expectation of a prolonged period of policy stability leaves currency markets with little fresh information to trade on. In addition, financial markets are in the midst of the traditionally quiet period marked by summer in the Northern Hemisphere. 

So what could get currency markets firing? Financial markets are forward looking; they will try to anticipate, to look for any shift in rhetoric from policymakers. 

In particular, financial markets will be looking for signs that the US Fed is gearing up to raise rates. This would confirm that the economic recovery is firmly in place and will highlight that the US economy is in a better place than its European or Japanese counterparts.

The difficulty is that the US Fed is very conscious of the still tentative nature of the US economic recovery, and conscious of not rocking the boat with early rhetoric about tighter monetary policy. Fed Chairman Yellen remains cautious in her commentary about the economic recovery and monetary policy. Indeed, in her recent testimony, Yellen said “Although the economy continues to improve, the recovery is not yet complete” and reiterated that current interest rate settings would be “appropriate for a considerable period after the asset purchase program ends”. 

This cautious approach is not surprising given what is at stake. Indeed, as RBA Governor Glen Stevens noted last week,  “My view is that policies were effective in averting a potential catastrophe five years ago. But fostering a strong recovery has been much more difficult”. 

So, we wait for the Fed to end its quantitative easing program and then we watch and wait for the recovery to become more sure-footed, for Fed officials to start to hint at a uniformly more confident and balanced economic outlook, to hint that rate hikes could be coming. 

In the meantime, the A$ treads water. It can’t rally too much because the fundamentals don’t support it, but it can’t weaken too much because the US$ is not ready to fill the space. 

Prolonged periods of range trading are not unusual for the A$. And so we wait. Those brave enough will trade the range, those with medium term objectives will be looking at rallies as opportunities to establish short positions. 

The remainder of 2014 is unlikely to hold much excitement for the A$, unless something unforeseen significantly changes the likely timing of US interest rate hikes. 


Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.




Will the bitcoin be regulated here in Australia?

Thursday, July 03, 2014

by Joanne Masters

In this third article in our series, currency expert Jo Masters looks at the future of the bitcoin here in Australia.

Policymakers globally are struggling with the bitcoin and, in particular, how to capture the bitcoin into existing tax and regulatory structures. As we’ve discussed, this is a critical path of the ‘coming of age’ of the bitcoin, but one that needs to be walked carefully.

Indeed, we wonder whether regulation of the bitcoin will provide the legitimacy it needs, or be the curse that kills an infant idea.  For example, one advantage of the bitcoin at present is the lack of transaction costs, but this could be lost if too much regulation is imposed. On the other hand, some regulation is needed to provide investors with sufficient safeguards to allow the bitcoin to establish a store of value.

The issue of regulation and taxation of bitcoins is relevant around the world. There is no right or wrong way forward, particularly given how rapidly the market itself is developing. At present, there is little (no?) global consistency.

In the US, the Supreme Court has recognised the bitcoin as ‘legal tender’, and the IRS is treating the bitcoin as ‘property’ (or like a stock) making it subject to capital gains tax.

The UK reversed a decision to apply VAT to bitcoins, but is continuing to charge corporate and income tax.  Singapore has classified bitcoins as goods rather than currency, and thus is subject to GST. In Germany, the bitcoin has been defined as ‘private money’ leaving it subject to CGT and VAT.

Russia has declared bitcoin transactions illegal, while China has banned its banks from handling bitcoin trades.

In Australia, ASIC has bitcoins on its regulatory radar, while Treasury has no plans to acknowledge bitcoins as legal tender. The bitcoin is not covered by the Anti-Money Laundering and Counter-Terrorism Financing Act because it is not backed directly or indirectly by precious metal or bullion. Australia’s big four retail banks are not engaging digital currencies.

The ATO has been consulting with relevant institutions, including the Australian Bankers Association, the Law Council, Bitcoin advocate groups. Guidelines on how bitcoins are to be treated for taxation purposes were due to be released by 30 June 2014 but have just been postponed.

A private ruling on the issue earlier this year confirms the ATO’s intention to tax bitcoins. Indeed, the ruling confirmed that income and profits derived from bitcoin transactions are taxable. In particular, that GST is applicable when transferring bitcoins to another party and that bitcoin profits are subject to CGT (although deductions are on an individual case basis).

There appears to be four main approaches under consideration by the ATO:

  1. Treat the bitcoin as a currency: bitcoins converted into A$ would generate a taxable gain or loss.
  2. Treat the bitcoin like property, leaving it subject to CGT (although a key issue with this option is how to value bitcoins that are mined, and how to treat potential deductions).
  3. Treat the bitcoin as a ‘right.’
  4. Not taxing bitcoins.

All four approaches entail complexities, and international experience shows that it is not a simple problem with a simple solution.


Bitcoins: currency or commodity?

Thursday, June 12, 2014

by Joanne Masters

One key issue being hotly debated in many circles is how to categorise the bitcoin. Is it a currency? Is it a commodity? Is it a unique, new financial instrument? For some, this is an economic debate, for many the outcome is a critical component for assessing the bitcoin in terms of taxation, regulation, and for trading and holding the asset.

From an economic perspective, there are three traits that a currency must exhibit: store of value; medium of exchange; and unit of account.

There is a consensus that bitcoins satisfy both medium of exchange and unit of account. Whilst bitcoin acceptability is still narrow compared to traditional currencies, it is broadening at a rapid pace and arguably will become more widely acceptable in time. In Australia alone, bitcoin usage was up 480% in the first four months of this year. In early June, eBay Chief John Danohoe said he sees bitcoin playing an “important role” in PayPal – a move that would be defining for the future of the bitcoin.

Defining bitcoin as a currency, however, stumbles when we consider whether it is a store of value.

Store of value is the part of a financial asset that has value that can be stored and retrieved in the future. In terms of currencies (or gold) the store of value reflects the base level of demand and the backing of the relevant central bank. Bitcoin has neither. Moreover, for many, one of the advantages of the bitcoin is lack of regulation and central bank oversight.

In a paper titled ‘Is Bitcoin a Real Currency?’, the US National Bureau of Economic Research agued:
A bona fide currency functions as a medium of exchange, a store of value, and a unit of account, but bitcoin largely fails to satisfy these criteria. Bitcoin has achieved only scant consumer transaction volume, with an average well below one daily transaction for the few merchants who accept it. Its volatility is greatly higher than the volatilities of widely used currencies, imposing large short-term risk upon users. Bitcoin’s daily exchange rates exhibit virtually zero correlation with widely used currencies and with gold, making bitcoin useless for risk management and exceedingly difficult for its owners to hedge. Bitcoin prices of consumer goods require many decimal places with leading zeros, which is disconcerting to retail market participants. Bitcoin faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and it is not used to denominate consumer credit or loan contracts. Bitcoin appears to behave more like a speculative investment than a currency.
Goldman Sachs have described the bitcoin as a ‘speculative financial asset that can be used as a medium of exchange’, but argue it is more like a commodity than a currency.

Australia’s bitcoin advocacy association, Bitcoin Australia, argues that the bitcoin is ‘money’ as it is a generally accepted medium of exchange for goods and services and the repayment of debt.

Describing bitcoin as generally accepted is a big call today, but that may not remain the case. Indeed, the lack of ‘store of value’ may reflect the infancy of the bitcoin market.

Certainly the lack of liquidity and high volatility is a hurdle for the bitcoin to be considered a store of value. However, does the volatility reflect the lack of liquidity? Does it reflect uncertainty about the sustainability of the bitcoin, or concerns about theft of bitcoins? Or that there is no reserve backing? And no regulatory structure?

I wonder whether the landscape will look different in the future? To develop a store of value, the bitcoin needs to be more widely acceptable within the commercial world. There needs to be some way to hedge exposure, to help reduce volatility. There needs to be some level regulation to safeguard users and investors.

But isn’t this starting to develop? Bitcoin is becoming more widely used and accepted, regulation is under development as are hedging products. Indeed, Coinarch is now offering a derivative trading platform, starting with contracts for difference (CFDs). Whilst this may have regulators nervous, it is a critical step in the coming of age of bitcoins.

Indeed, one of the problems for regulators and legislators is that the global stage for bitcoins is moving, developing and shifting so quickly. The regulatory and taxation structure is under review but needs to be developed with the future in mind.

From an economic point of view, perhaps it doesn’t matter whether we call the bitcoin a currency, a commodity or a financial asset. However, the same cannot be said for regulators and policymakers.

And this is exactly what is being grappled with globally as policymakers try to work out how to regulate and how to tax bitcoins in a manner that is equitable, consistent and without strangling the very concept.


Competing with our cousin

Wednesday, May 28, 2014

by Joanne Masters

The New Zealand dollar hasn’t gone one-for-one with the Aussie dollar for 40 years. Could this happen in the near future? Jo Masters explains.

The Aussie and New Zealand dollars have much in common. Both are commodity currencies (albeit with New Zealand’s being agriculturally based), both are traditionally high yielders, and both benefit from strong risk appetite. As a result, these two currencies often compete for global funds. 

Indeed, $A/$NZ has been one of the most watched currency pairs in recent months, and no wonder as the pair brushed perilously close to historic lows in January and again in mid-March.

The Aussie has been under-performing its antipodean cousin for over a year now (see chart), with the cross ($A/$NZ) falling to 1.0493 on 24 January and then 1.0540 on 12 March. The pair has not been below 1.05 since December 2005, when it hit a record low of 1.0434, before bouncing to 1.07 within a matter of days.

Similar to 2005, the $A has found support around those lows on several occasions recently. Equally though, the domestic unit has failed to generate enough momentum to break above the all–important 1.0880 level.

With the $A holding support, but failing to break resistance, many are wondering if this is the pause before a run toward parity, or the calm before a serious attempt higher. For the record, the $NZ has not found parity against the $A in 40 years! What happens next is important for Australian businesses with New Zealand our 6th largest trading partner.


A quick look at an economic scorecard clearly highlights the relatively strong economic underpinnings for the $NZ. That is not to say that Australia’s economic outlook is compromised, but remember currencies are all about relativities. And New Zealand’s relative strength at present was again highlighted by the release of its 2014/15 Budget just days after Australia’s.

New Zealand announced an expansionary, family friendly Budget, with a return to budget surplus projected in 2014/15. Moreover, NZ Prime Minister John Key has said there may be room for tax cuts ahead of September’s election (and this off a top marginal tax rate of just 33%).

Budget forecasts showed NZ economic growth strengthening to 4% in 2015, from 3% in 2014, while inflation is expected to rise to 1.8%, from 1.5% (note: these forecasts are March years, not June years as in Australia).

Much has been written about the Australian Federal Budget, but in summary it’s not friendly to anyone, with surpluses a distant five years away. Moreover, Treasury is forecasting economic growth to moderate to 2.5% in 2014/15, from 2.75% this year. Not surprisingly, inflation is expected to moderate to 2.25% in 2014/15.

As you know, I believe currency markets are not too interested in Budgets but the comparison of the two is rather stark. Currency markets do care about interest rates – or more specifically relative interest rates. And here is where the underpinnings for $NZ over $A come to the fore.

The Reserve Bank of New Zealand (RBNZ) has commenced its rate hike cycle, with two consecutive rate hikes this year already taking the cash rate to 3%, from 2.5%. Moreover, many believe the RBNZ will hike again in June and continue to normalise monetary policy settings in the months ahead, taking the cash rate to 4% in 2015.

In contrast, while the chance of any further rate cuts in Australia has diminished, the timing of any rate hikes is well in to the future. Indeed, respected economist Saul Eslake shifted his view last week and now sees the RBA on hold until 2016. And he is not alone. So, that leaves local rates at 2.5%, with NZ rates at 3% and on the rise in a matter of months.

Against this backdrop, it is little wonder that the $NZ has found favour amongst investors. That explains the strength in the $NZ, but it does not explain why $A/$NZ has held support levels and where the cross rate may head next.

The outlook for both Australia and New Zealand’s commodity prices depends critically on China. While the $A is currently absorbing lower iron ore prices, so too the $NZ is absorbing lower milk prices. (And don’t underestimate milk, the dairy industry is New Zealand’s largest export earner).

One factor that is limiting further falls in $A/$NZ is market positioning. There’s little doubt that the market is already short $A/$NZ, and it seems risky to add to that when the cross rate is already around recent lows.

Moreover, much of the ‘good’ news is already priced in the $NZ. The RBNZ is expected to raise rates, and the risk seems more likely that the pace of tightening will be slower than expected (particularly if the $NZ remains so strong), rather than faster than expected.

In addition, part of the strong economic outlook is underpinned by the estimated NZ$40 billion of expenditure in rebuilding Christchurch after the 2011 earthquake.

While $A/$NZ could well spend a few more months bouncing in recent ranges, I expect the next break will see the cross-rate higher. With much of the ‘good news’ already priced in to the $NZ, a push to parity, to new territory, would require something new, something unexpected, it is difficult to see what that could be.


Bitcoins: fad or future?

Wednesday, May 21, 2014

by Joanne Masters

Like it or not, Bitcoins are becoming more mainstream – in their recognition, use, and integration in the day-to-day world. As more and more people learn what a Bitcoin is and how it can be used, the debate and discussion on a number of issues surrounding the Bitcoin has intensified.

Firstly, so we’re all on the same page, what is a Bitcoin?

A Bitcoin is a type of crypto currency (also referred to as digital currencies and cyber currencies), first launched in 2009.

A Bitcoin is a string of numbers that can be transferred peer-to-peer using a decentralised network of computers. The same network issues new Bitcoins to users who perform complex calculations (known as “mining”) and ensure the authenticity of the transaction. The Bitcoin is not issued or backed by any central authority or Government and can be traded anonymously and with little or no transaction cost.

Bitcoins are held in a ‘Bitcoin Wallet” on your computer. However, be wary, the wallet can be hacked and stolen and there’s no back up! Indeed, the largest Bitcoin Exchange – Mount Gox – filed for bankruptcy late last year after the theft of 850,000 Bitcoins belonging to customers and the company (about 6% of Bitcoins in circulation!). At the time, Mount Gox was handling 70% of all Bitcoin transactions.

The algorithm is such that the creation of Bitcoins is halved every four years. The last coins are expected to be generated around 2140.

Bitcoins can be:
purchased through various “exchanges”  and recently even ATMs.
accepted in exchange for goods or services.
“mined” (mining requires such extensive computer power that most mining is now performed by a group of users, or a ‘mining pool’).

Bitcoins are generally used for online purchases or speculative trading. Speculative trading can occur on one of the various exchanges, and there has certainly been sufficient volatility to excite those brave enough. Indeed, the US$ price of a Bitcoin went from US$5 in mid 2012, to US$13 by the end of 2012, to US$88 in mid 2013, before jumping in the space of six weeks or so to a high of US$1135 on 5 December 2013, before sliding back to around $440 currently.


Aside from speculative trading, much of their activity was initially associated with illegal activities (due to the un-traceability of the transaction). The extent of this was highlighted when the US FBI shut down black market trading website Silk Road and seized over 170,000 Bitcoins, about 1.5% of all Bitcoins in circulation and equaling around US$34 million at the time.

That said, Bitcoins are becoming more commonplace for commercial transactions, particularly on the internet. There are over 100 places in Australia that accept Bitcoins, for everything from beer and pizza to car hire to electrical products to art galleries and a dentist. According to CoinMap, there are 4410 places globally that accept Bitcoins.  There are even several ATMs in Australia where Bitcoins can be purchased.

Bitcoin is the most recognised digital currency, but many exist. Other well known ones include Litecoin, Namecoin, Dogecoin, Peercoin, Mastercoin. Although to put it in perspective, according to Coinmap, Litecoin is accepted at only 396 places globally.

Proponents of Bitcoins argue that they are a safer way to transact over the internet as the anonymity reduces the risk of identity theft. You don’t need to hand over a credit card, a bank account number or a PayPal account. Transaction costs are minimal (if not zero), compared with 3-4% for using credit cards or PayPal. Moreover, with the Bitcoin quoted to eight decimal places, its divisibility allows for extremely small transactions.

Many believe the closure of the Mount Gox Exchange exposed a catastrophic fault with crypto-currencies, and confirmed that the Bitcoin is merely a fad.

There is much global debate about this, with some influential names on both sides of the argument. For example, renowned economist Paul Krugman is “unconvinced” and penned an article titled “Bitcoin is Evil”. On the other hand, former US Federal Reserve Governor Ben Bernanke believes the Bitcoin “may hold long term promise”.

Undoubtedly, it’s early days and the Mount Gox experience highlighted a significant deficiency. However, in my view, it is naive to write off crypto-currencies. Yes, there are significant shortfalls but this is just the first wave. Like any financial instrument, it will develop, change and mature.

Despite the current limitations, the possibilities are exciting. Secure transactions over insecure networks with no transaction cost. Sounds good, doesn’t it?

Bitcoins can reduce the mammoth problem of global fraud and identity theft. They can facilitate very small, frequent transactions, which could be used to fight spam.

Governments, regulators, financial institutions as well as vendors and consumers are all trying to work out how Bitcoins fit in to our global structure. They are new, different and untested. There are issues of tax, regulation, fraud, safety and security. But, there is movement under-foot.

Bitcoins won’t disappear, but the Bitcoin of the future will be more regulated and more transparent.



The Yuan: yearning for world fame