Welcome to Eureka Street

back to site

ECONOMICS

Aussie dollar falls to fast money folly

  • 03 July 2013

When the Australian dollar fell almost 5 per cent in a few days it was a salutary reminder of how fast the currency markets can move. Fast change has been a feature of globalised capital markets for at least two decades, especially in the smaller currencies. They can quickly rise because of trader sentiment and just as quickly fall.

The after-the-fact explanations seem perfectly reasonable, but the rapidity with which the re-pricing occurs is not. There has been a decoupling of what money does and what money is supposed to represent. Suddenly, Australian manufacturing exporters become more competitive, and importers of foreign goods for local sale less competitive. People involved in the real economy have to respond to the financial markets as well as their customer markets.

A currency's value is supposed to represent the state of the country's underlying economy. Yet very little changed about the Australian economy during a week in which the value of the dollar was substantially altered. It is a small instance of how rapidly change occurs in currency markets, sometimes to devastating effect. During the Asian financial crisis, entire economies were brought to their knees in a matter of weeks.

Since about the 14th century, time and money have been inextricably linked, and as we change our approach to that relationship, we also change money itself. This is creating deep problems in the capital markets of the 21st century. A massive disjunction is appearing, due in part to higher levels of technological sophistication. There is a mismatch between the speed of pricing, and the much slower changes in what the pricing is supposed to reflect.

It is one reason why the capital markets are ruling rather than serving. Local manufacturers are being ruled by the currency markets because the high Australian dollar is making local labour too expensive. The world of high speed 'meta-money' is developing a logic of its own, and increasingly has a predatory relationship with more conventional economic and financial activity.

Worse, transactions in most financial markets now occur in micro seconds and even nano-seconds. This has little to do with what capital is for. In the stock market, how can the value of a public company change meaningfully in a nano-second? Yet that is increasingly happening in the United States (about 70 per cent of trade is high frequency trading). Much of the activity is facilitated by mathematical formulae which are timeless by definition. So