Aussie Losses Exaggerated

The Australian dollar has been hit by the broad dollar recovery and weakness in commodities, which may be partly linked to the risk of further tightening of monetary conditions in China. There is another factor that may be taking a toll. Local papers report that Ken Henry, the Secretary to the Treasury, is recommending a tax reform in Australia that aims at replacing a royalty tax on mining projects to a national resource rent tax, like the one on petroleum and related products.

Unlike some of the state-based royalties, the proposed resource tax would be applicable only on profits (not revenue) after exploration and development costs have been absorbed. At some times the new tax would have raised less money than the royalty tax, especially during years that miners were struggling. Australia's Treasury estimates that the new tax would have raised about A$14 bln more than the royalty tax raised over the past three years.

Ironically, gold miners were exempt from all taxes until 1991. That exemption lasted 70 years according to reports. It has hardly been a state secret that Australian government has felt that miners were not paying sufficient tax, given their heavy use of public goods, such as water and infra-structure. However, the government has ruled out imposing an extra tax on bank bonuses and appears to be ruling out new taxes on financial services, which account for about 10% of Australia's GDP.

The Australian dollar has rallied strongly in recent weeks to approach the high from last Nov just above $0.9400. However, once minor shelf near $0.9170 was violated yesterday, the Australian dollar has not looked back. It is now flirting with support seen near the retracement objective of the rally that began just prior to Xmas and comes in near $0.9035 today (100 day moving average ~$0.9025). A break could spur a move toward $0.8950.

In our recent weekly publications we have recommended long Australian dollar short New Zealand dollar positions and still generally like the trade.
Aussie Losses Exaggerated Aussie Losses Exaggerated Reviewed by magonomics on January 21, 2010 Rating: 5
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