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Andrew Kositkun Foreign Exchange Head Trader
Australia has been combating catastrophic fires since September of last year. The fires in Australia have burnt more than 7 million hectares of land. For context, .8 million hectares was burned in the California fires in 2018. The intensity and breath of the Australian fires have been compounded by the major drought that Australia is also going through with no major rainfall expected in the worst hit area.
From an economic point of view, it is extremely difficult to assess the impact to the economy given all the variables. Given this, here are some of the channels through which the economy will be impacted.
Additional government funding has been announced for affected regions with federal government support coming through disaster relief funding. For a point of comparison, the 2009 Victoria fires burned ~.5 million hectares and cost the government A$4.4 bn.
Disruption to Growth It has been estimated that the drought would take ~3.8% off of farm GDP and rural exports before conditions deteriorated at the end of 2019 so clearly the final impact will be greater. Generally speaking, natural disasters are felt immediately through a short term fall in GDP related to delays in planned spending, impact on tourism and rising uncertainty for consumers. However, this is usually followed by a strong bounce-back due to reconstruction efforts.
Many observers have linked global warming and climate change to the current wildfire crisis. This is a particularly sensitive topic for Australia as coal is its second largest export. Current PM Scott Morrison is the latest in a line of Liberal leaders to play down the potential impact on carbon emissions. Combined with downplaying the severity of the fires and a Hawaiian vacation (PM Morrison ultimately returned early) as the situation worsened last month, the Liberal government is suffering from a perception of poor judgement. However, the impact of this may be minimal as the PM doesn’t stand for reelection until 2022.
Impact on Monetary Policy
The RBA has highlighted poor weather as a factor contributing to weakness in household incomes and consumption. Since these comments, conditions have only gotten worse and the board is set to review its forecasts when it resumes meetings in February. In this light, the risks are for the RBA to cut sooner rather than later. The economy was soft and the fires present another headwind to growth.
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
Rockets being fired at the Baghdad’s green zone rattled the markets yesterday afternoon. However, markets have shaken off this news as there were no casualties from the attack and it is likely that the attack was from a Shiite militia group in the region. If true, there doesn’t appear to be much risk of further direct confrontation with Iran.
German industrial production beat estimates at 1.1% MoM against estimates for a 0.8% increase. As a reminder, German factory data disappointed yesterday. While the positive sentiment from a Phase 1 deal should help the German economy, it will take time for this to flow into the data.
Speaking of the Phase 1 deal, China formally confirmed that Vice Premier Liu He will be in the US from Jan. 13-15 to sign the deal. This confirms media reports from earlier this week.
Chinese CPI rose less than expected. A surge in pork prices have driven a surge in inflation. Overall this report shouldn’t do much to change the policy outlook for the PBOC, which is expected to focus on growth and remain accommodative.
Two headlines are pressuring the GBP this morning. The first has to do with trade. Fisheries were expected to be an easy area for compromise as it affects so few UK citizens, however the UK government has taken a hardline on this. It’s possible that this is a negotiating tactic that will allow the UK to concede on this to gain concession elsewhere. The second headline has to do with the BoE and its dovish comments. Specifically, Gov. Carney stated that the rebound from Brexit uncertainty is not guaranteed and “persistent weakness could require a prompt response.”
Mexico YoY CPI came in higher than expected at 2.83% versus 2.78% although this print was a decline from the last print of 2.97%. The next policy meeting is February 13 and a 25 bps cut is still expected.
Data on Japanese purchases of foreign stocks continues to show strong demand. Japanese purchases of foreign risk assets has been a key support for USDJPY.
Thailand took further steps to push back on currency strength, which has been disconnected from economic fundamentals. The Thai baht has been one of the world’s top performing currencies due to its safe haven status and high interest rates.
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