Australia and that Dutch Disease

I have written in July about the problems facing Australia and the ‘Netherlands Nausea’ ..


Chart courtesy of Bloomberg. Click on chart to emblazon

Australia and that Dutch Disease an extract from an article on Bloomberg.

“The hangover from the end of the commodity supercycle has wreaked havoc on a number of advanced economies.

Barclays’s foreign exchange research team found that Australia, Canada, Norway, and New Zealand have been victims of a “Dutch Disease pandemic during the recent commodity boom.”

What’s Dutch Disease, you ask?

Dutch Disease refers to the process by which an increase in commodity prices exerts upward pressure on the currency of a nation that exports that natural resource, and causes a decline in the country’s manufacturing sector, which loses competitiveness as the exchange rate rises.

“In an environment of falling export prices and slowing demand for commodities, the severity of an economy’s Dutch Disease likely will determine the extent of currency depreciation needed to balance the economy,” wrote the Barclays team. “In extreme cases, where new investment is required to expand the non-commodity export sector, both international and domestic investors likely will want to see a significantly lower exchange rate to offset the fixed costs of committing new capital.”

As such, Barclays recommends shorting the New Zealand kiwi and Aussie dollar relative to the U.S. greenback, or, for the more risk-averse, going long the Canadian dollar vs. its Antipodean peers.
May be ‘Netherlands Nausea’ as well – regardless Australia and the AUD has a fair way to go.

Full article link at Bloomberg.


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