Tax Exocet May Have Holed The Aussie. By Nicholas Hastings

The mining tax exocet that hit the Australian dollar last month may have inflicted irreparable damage to the currency.

Since the tax was announced at the start of May, the Aussie has fallen about 11% against its U.S. counterpart.



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Of course, some of this decline has been driven by a deterioration in global risk sentiment as concern over the global economic recovery has increased.

But, according to Simon Derrick, a senior currency strategist with The Bank of New York Mellon in London, the fall in the Aussie from nearly $0.93 to under $0.83 occurred after the Australian government confirmed that it will impose a 40% tax on the super-profits of mining companies from 2012.

Apart from stirring domestic outrage, the tax appears to have triggered concern among international investors, who have been selling Australian stocks every day since the announcement. Derrick noted that these sales were often to the benefit of Canada, the world's other major commodity-driven economy.

With talk of mining companies shifting their operations overseas and with the tax now posing a risk to the Australian government ahead of elections due in 10 months, the whole episode could bring about much more lasting damage to the Australian currency.

Instead of the Aussie waiting on the sidelines to rally again when the global sentiment recovers and investors return to high-yielders, the currency could find itself with limited support and its upside potential severely curtailed.

This doesn't mean that there aren't still many other reasons for buying the Aussie.

The Australian economy continues to recover strongly, aided by strong growth in China. New data from Beijing Friday are expected to show that despite attempts to tighten policy, the Chinese economy continues to power ahead with both retail sales and industrial production remaining up at very high levels.

Data earlier Thursday have already confirmed that Chinese exports soared by nearly 50% in the year to May.

With the recent slide in the Aussie likely to add to inflationary pressures at home, the Reserve Bank of Australia may well find that it has to consider resuming its rate hiking cycle sooner than money markets now suggest.

A fall in the rate of unemployment to 5.2% from 5.4% suggests that the economic recovery is strong enough to take another rate hike.

Certainly those looking for a hawkish spin would have been encouraged by Reserve Bank of Australian Governor Glenn Stevens admission Wednesday that the current level of interest rates isn't high by the standards of the last decade or two.

As a result, the Aussie is still showing signs of lift--jumping early Wednesday when an improvement in market sentiment encouraged a general move by investors into risk.

However, these gains may not only prove smaller but also less sustainable if the mining tax has undermined foreign interest in the Australian markets as it now appears.

Early Thursday in Europe, the Australian dollar was up at $0.8380 by 0645 GMT from $0.8272 late Wednesday in New York, according to EBS.

Apart from the strong Chinese and Australian data, the Aussie was being helped by a general improvement in market sentiment as New Zealand launched its rate-hiking cycle as expected and Japan revised its first-quarter gross domestic product growth estimate higher rather than lower as expected.

The euro also benefited, rising to $1.2033 from $1.1980 and to Y109.59 from Y109.21.

The dollar slipped though to Y91.06 from Y91.13.