Aussie dollar headed to 1960s lows

The stubbornly high currency is widely expected to slide below US70 cents, with upside for some sectors and pain for others.

If someone said to you that we’re all going back to the 1960s, don’t imagine they’re talking about a return to a time when the Beatles ruled the music world – they’re talking about the value of the Australian dollar.

And before you say that a fall in the dollar from its current exchange rate of around US86 cents to US69c means the currency needs to fall by around 20 per cent, consider what’s happened over the past 18 months because the dollar has already fallen by roughly that amount.

Difficult as it might be to grasp, but since mid-April last year the Australian dollar has fallen from $US1.05 to its current level, an 18 per cent correction which almost qualifies as a crash.

The next leg down, for a number of reasons, has been delayed but, as currency traders rework their computer models by including the latest prices for iron ore and oil, they will see that Australia’s terms of trade with the rest of the world are the worst they have been in decades.

Factors preventing the dollar from sliding into the US70c range, and then down into the US60c range include a global currency war which has seen a number of other countries, such as Japan, deliberately depreciate their currencies as a tool to aid exports.

Even China seems to have joined the currency game, with last week’s surprise interest rate cut said to have been be a way of boosting its weakening economy but can also be seen as a way of cutting the value of the Chinese currency, the renminbi, against the value of the Japanese yen.

Australia, given the size of its economy, cannot play currency games against some of the world’s biggest countries. Our only option is to allow the dollar to float to its natural value and while it has been holding US86c for a few weeks those iron ore and oil prices will trigger the next step down.

How low the dollar will go, and how quickly, are the two questions, which are impossible to answer. Analysts at US investment bank, Morgan Stanley, reckon we’re on the way to US85c by the end of December, and then down to US76c by the end of next year.

The Reserve Bank of Australia, which has the job of protecting the currency, is quite relaxed about the prospect of a weaker dollar. In fact, there is every indication the central bank would welcome a significantly lower exchange rate.

The bank’s latest comments about the currency, in surprisingly blunt terms, made a strong case for a currency fall.

“Despite the recent depreciation of the exchange rate (the fall from $US1.05 to today’s US86c), the Australian dollar remains above most estimates of its fundamental value, particularly given the further declines in key commodity prices over the course of the year to date,” the bank said.

With commercial and government bankers talking the dollar down, there seems little doubt the currency is poised to fall further, a move which will be welcomed by exporters but irritate importers.

Miners and farmers, who sell most of their products in US dollars, will welcome another 20 per cent off the value of the dollar but will find imported capital equipment such as earthmovers and tractors more expensive.

Investors thinking about playing the hot new game of acquiring international assets will also find that conditions could change considerably next year and now might be their last chance to beef up their portfolios before prices go up for anyone investing with Australian dollars.

Potential travellers might also think about what a lower dollar does to their plans because they will find that the currency will not go as far next year as it goes now.

Hitting hardware

Currencies are not the only part of the business world where there is a war being waged. In the retail world there is also a titanic struggle under way – and it’s not the traditional battle of shops versus the internet.

Hardware, especially of the do-it-yourself home improvement variety, is the current focus in the long-running competition between Woolworths and Coles, which have always competed for food sales.

The spread of both retailing giants into the beer and wine sectors of retailing is another hot spot for both companies but it’s in hardware that a real life and death contest is under way.

In one corner there is the Coles associate, Bunnings, (both are owned by Wesfarmers). In the other is the Woolworths hardware brand, Masters Home Improvement.

As the national leader, Bunnings is making life extremely difficult for Masters, so difficult that the cost of building the Masters hardware brand is weighing on the share price of Woolworths, which has sagged by 20 per cent over the past 12 months compared to an 8 per cent fall by Wesfarmers.

That share price comparison is not solely a reflection of the hardware war, with Coles also outperforming Woolworths in food.

The cost of developing Masters, which is joint venture with the US hardware chain, Lowe’s, is estimated to have hit $2.9 billion, with profits still expected to be several years away, a situation which is starting to affect the reputation of Woolworths management.

More interesting is the fact that the Australian team in charge of Bunnings, with their deep-rooted local retailing knowledge, appear to be running rings about the Masters team, which is led by US retail exports from Lowe’s.

Local knowledge can go a long way.

Heading

Japan was once a big producer of aluminium, before high energy costs saw most of that country’s metal smelting capacity relocated to Australia and elsewhere in the Asia-Pacific.

History seems to be repeating in Europe where high energy costs are forcing the closure of aluminium smelters across the region.

Since 2007, close to half of Europe’s smelters have closed, with the last 12 facing an uphill job of staying in business as the aluminium industry migrates to regions with cheap power, particularly Canada and the Middle East.

The internet is the most destructive invention in history – Tim Worner (chief executive of the Seven Network