economy 101 question

Discussion in 'Markets & Economies' started by phillis, May 17, 2012.

  1. phillis

    phillis New Member

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    ive got a very basic question about this whole euro zone/greek thing thats been going on

    so greece has no more money left? and this in turn is making the euro less valuable, or not as good of an investment as it could be. so why is this affecting our stock market? why is affecting the price of commodoties? why is this affecting the price of our dollar against the USD and almost every other currency? surely if the euro isnt a good investment, people would want to buy more JPD, USD or AUD...so why is our dollar going down against most other majors?

    i realise its a very simple question, but all this theory and underlying knowledge from the internet seems to go out the window when stuff actually happens!
     
  2. Kawa

    Kawa New Member

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    I posted a topic recently on this with the same question essentially.I have a B.Econ from Qld University St Lucia however I don't know the answer nor comprehend the dynamic.

    So anyone could post a reply here on this and I will likely most believe it.
     
  3. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    Our dollar has been popular for a few reasons.

    The political stability in this country and our low level of government debt means it is unlikely that any bonds (notes of promise from the government) bought by foreign countries, sovereign wealth funds or private companies or citizens will be defaulted on. This alone though is not enough to encourage our dollar to appreciate. So it needs a couple of other stimulants:

    Our high interest rate when compared to other western democracies (Brazil's is way higher but they are less stable)

    and the commodities booms resulting in high prices for Australian commodities.

    So one reason why our dollars depreciates when there is world turmoil is that commodities may be in less demand as other countries economies stagnate. Another is that speculators want to minimise their risk of exposure and would prefer cash in the bank so to speak. Now cash in the bank to mere mortals and non-US residents is their native currency in the bank. But to the high end risk takers and international commodity players, its USD or JPY. So there is a flight away from small riskier plays (AUD, NZD, CAD) to the USD because its presence is much greater - and wait for it - it has the backing of the United States Government.

    Why? Because it's still popular, highly liquid and they nothing different.

    Changes in our credit worthiness, our interest rates, prices of commodities all impact on the price of our dollar.
     
  4. Nedsnotdead

    Nedsnotdead Active Member Silver Stacker

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    Its Zuckerburgs fault!
     
  5. spannermonkey

    spannermonkey Well-Known Member Silver Stacker

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    +1
    Public lynching for him jut after the float tomorrow :lol:
     
  6. Kawa

    Kawa New Member

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    Seriously.You sure?
     
  7. Wout

    Wout New Member

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    All financial markets are now so intertwined thanks to the mutations fiat money creates, eg all these derivatives out there, that when something goes down it affects alot more than it used too and also people sell off liquid positions such as other currencies or commodities to cover losses there copping on exposure to European debt so it has a run on effect

    Its also conventional wisdom thanks to that Keynes wanker that we must always be on ever excelling growth to stay prosperous so when growth outlook diminishes, like in a recession where the economy is trying to heal itself, markets freak out and people sell off speculative positions and flee to "perceived" safety eg US dollars/bonds. So the AUD being a commodity based currency thanks to our mining boom is a play on commodities and they get owned in a deflationary environment where people are selling off so the AUD gets dropped out of favour, then bought again when its "risk on" time

    And I thought Suckerburg was going to save the day with his BookOfFaces IPO
     
  8. jpanggy

    jpanggy New Member

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    If Greece defaults, then the European stock market will be hit because most banks from the Core euro countries have exposure to Greece. The bigger fear is contagion, as the fear of a default in Greece will lead to deeper recession for Spain potentially pushing it to default that leads to Italy. Eurozone can not bail out Spain and Italy without significantly killing its economy. Their link is in the bank exposures (Italy lends to spain and greece and vice versa) a default of one country can lead to default of another.

    How does this affect commodity price? Because the market "prices in" these things. They assume crisis will lower demand and therefore lower price. Hedge funds and big buyers and holders of commodity normally sell a portion of their holding (including aud) during these times to flee to USD or US treasury bond (T bond) therefore killing certain asset prices and drives USD to high heavens.

    JPY is still safe haven and they are not moving much. Our dollar lost its value due to the big boys letting go of our dollar in lieu of other assets, why are they selling AUD? Because of economic uncertainty and the amount of potential bad news for Australia (cancelled projects, slowing china, etc etc) bear in mind that the big players of the world has information that you and I do not have access to (sovereign movement, internal policy, price settings, etc).
     
  9. wrcmad

    wrcmad Well-Known Member Silver Stacker

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    Thanks for that jpanggy, very simple to understand. Also reinforces what I guessed was happening.
     
  10. JulieW

    JulieW Well-Known Member Silver Stacker

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    Probably time then to repost this.

    [youtube]http://www.youtube.com/watch?v=I5QwKEwo4Bc[/youtube]
     
  11. Lovey80

    Lovey80 Well-Known Member

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    When times are good.... Overseas big boys want shares in big Aussie companies and commodities. Big boys swap USD for AUD to buy Aussie companies and commodities that creates "demand" for AUD and drives up exchange rate and share/commodity price. Higher commodity price creates bigger profit for big miners. Bigger profit creates more demand for shares = more demand for AUD. Also, with "relatively" low public debt, Aus govt bonds are stable and in demand = demand for AUD to buy them.

    Now with govt not allegedly creating much more bonds next year = a little less demand for AUD to buy them. Also when Europe hits the fan big style, growth will stop and demand for commodities will drop. Do everything in paragraph 1 in reverse.

    Edit: just reread the above it it reads like a caveman wrote it lol
     
  12. Trichter

    Trichter Member

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    It wasn't one question ...it was at least three! Regarding the AUS$ - you may or may not know that the US$<>AUS$ is the fourth most traded on the Forex ... that should tell you sometinhg about why the Aussie dollar is dropping on the news of Spainish bank downgrades. Put very simply ... the AUS$ is a "risk on" trade (bullish) while the US$ is a "risk off" trade (bearish). For this reason, it is very likely that the US dollar will gain dramatically in the near to medium term.

    As to the wider topics of the stock market and the like... as some have pointed out above, things are all interconnected and Australia is somewhere in the web. If you are looking for a causation narrative to rationalise market events though - just choose one. It will be largely BS, but it will be yours :). Somewhere across the quantum divide, between robo trades, fractals, herd dynamics, derivatives and our fear-flight reptillian brains lies the truth.
     
  13. pmbug

    pmbug Active Member

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  14. Dogmatix

    Dogmatix Active Member

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  15. Nugget

    Nugget Active Member Silver Stacker

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    IMH(and uneducated)O



    Imagine Greece as a State of Australia (or the US)


    If NSW went broke (soz I'm a Queenslander so I pick NSW as being the bad guy) that'd have a negative effect on the AUD and Australia's reputation.



    Why would it effect the price of commodities? I suppose it'd be because things are iffy so cash is the place to be.






    I'll put it out there but the way I see it, until the debt is paid down or defaulted on we're going to have problems. I'd rather the debts were defaulted on for a quick resolution. After all, if anyone were foolish enough to loan me $1billion to spend as I wish then more fool them because I'd have spent it all on booze, food and women and the rest I would have wasted (apologies to whomever I paraphrased). So what I'm saying is, there is a risk when you loan money to people, loaning money to sovereign countries carries the lowest risk but it still carries some risk and sometimes risk doesn't paid off.
     
  16. mmm....shiney!

    mmm....shiney! Administrator Staff Member

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    Thanks PM Bug, easy to understand explanation.


    Source: http://www.investopedia.com/articles/forex/07/carry_trade.asp#axzz1vE9kM3Wx

    I was a bit surprised in the lead up to the last RBA meeting that the AUD remained so strong, and in fact only started to fall with the news of JP Morgan's woes and Greece's election drachmas, dramas. Are the big players smelling another financial collapse (aka as a GFC) on the wind?
     
  17. jpanggy

    jpanggy New Member

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    It does not require another GFC to collapse the forex for AUD.

    It just needs persistent deflation and consistent bad news from China and Asia.
     
  18. BlackSheep

    BlackSheep Well-Known Member Silver Stacker

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    The "Trading Week" report on Macrobusiness seems to give a reasonably comprehensible summary of the markets from an australian perspective. Helps me to try and make sense of all the madness in the markets anyway :)

    http://www.macrobusiness.com.au/

    One thing that stood out to me in this weeks report is they suggest the slowdown in the BRIC's countries is causing a sell-off on commodity currencies such as the AUD. Commodities are covered fairly well also.

    Here's a snip from the Trading week article:
     
  19. JulieW

    JulieW Well-Known Member Silver Stacker

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    I think that basically nobody knows what's going on, the machines are running the markets and the crooks and shysters with their vested interests are running like they always do - to supposed safety in USD. And then every now and then a chicken little steps into their room and says all change and they run around again.

    That is the single most scariest thing about all this. Nobody knows what is going on or how to fix it. We can say 'debt' but that's what derivatives and all that imaginary wealth is about. There is no reason 'debt' should be the problem that it is right now. The problem is the ham fisted, or conspiratorial, attempts to engineer results that have no basis in reality.

    With nobody knowing what's going on, and moral hazard turned off for the major players, the AUD could go to 50c for no reason, and for the same reason go to $1.70.

    That's why silver and gold.
     

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