A long time ago I made a bad rate bet (and yes, a good many since). I put on a deflation trade based on what I thought might happen. The exact opposite was the result. The “growth trade” was the right read of the tealeaves. My (very) leveraged bond and FX trades went to hell. Such is life.
A large earthquake had hit Japan. Damage all over the south. Infrastructure, utilities and manufacturing facilities were hard hit. Lots of residential damage. No trains. Roads closed. Ports closed. Airports closed. Communications down all over.
My conclusion? This has to be deflationary. It would hurt growth. Bonds would go up and the currency would weaken as a result. Wrong, wrong wrong. It is actually the other way around. At least that is the case for most industrialized countries.
Insurance companies pay claims. That money is immediately put to work making repairs and replacement construction. The state, city or national governments pull out the stops. Charity comes into play in a big way. Industry is also insured for most of the losses. Reserves/savings are dipped into at every level from consumer to central government. Utilities spend what they must to make repairs knowing they will recoup losses with future rate increases.
The good thing about a market misread that costs you is you don’t forget it. I have seen the growth trade play out a number of times since getting hit on the head. South Florida, NO, Indonesia, lower Manhattan come to mind. There might be another one in the making.
Looking at the chart of the AUDUSD since year-end I am wondering if there is not a bit of “sell on the flood” in the current price. If so, that would be a misread based on my experience. There will be a surge in domestic demand. For the AUD strong domestic demand means higher interest rates and foreign capital flows. It means a stronger AUDUSD.
There are always many factors that influence FX rates. Natural disasters are just one. These headlines suggest that weather is playing an out sized role. We shall see.
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