It might be too early to crack the champagne but junior miners are certainly celebrating the weakening of the Australian dollar, which had lost its traditional connection with commodity prices and remained stubbornly high for the past year.
This week, the Australian dollar returned to parity against its US counterpart and even dipped below that briefly, giving exporters hope that Australia might be losing its status as a safe haven for currency investors.
A better-performing US economy and lower Australian interest rates were seen as key reasons for the dollar’s fall against the greenback.
Panoramic Resources managing director Peter Harold said his company was appreciating the fall, with every US1 cent drop in the value of the Aussie dollar against the greenback amounting to a $2 million increase in revenue, which flowed directly to the bottom line.
“We are celebrating,” Mr Harold said.
“It has been defying logic for some time.”
He said a fall in the dollar to US95 cents from its recent highs of $US1.05 would represent a $20 million boost. Even at that level, the Australian dollar would be trading well above historic averages.
“I don’t know what a natural level is,” Mr Harold said.
“There is a school of thought that, at $US1.05, the currency was between 20 per cent and 25 per cent overvalued.”
Mr Harold said the Australian dollar could come under more pressure if importers sought to take currency protection in anticipation of further weakening.
Investment bank UBS also recognised the currency sensitivity of Australia miners in a note to clients on Monday, which highlighted the unexpected drop in the Australian cash rate and weekend conjecture in the US that Washington was looking to end its quantitative easing program as its economy picks up.
“Investors are quite rightly asking what the impact of this move in the $A on the earnings of Australian miners is,” UBS said.
The bank thought a weaker Australian dollar would drive up earnings per share and result in improved equity performance, because its current forecasts estimated the currency would hold at $US1.04 through till June 2014 and then slip steadily down to US85 cents by 2017.
But not everyone was seeing this week’s drop as a portent to a sharp revaluation.
Hartleys head of research Trent Barnett said junior miners were extremely sensitive to commodity prices, including those generated by currency changes.
However, Mr Barnett said resources companies’ equities traditionally were positively correlated to the Australian dollar. Complicating that, though, has been the safe haven status of our currency, which has buoyed it at the same time that commodities have fallen.
“The idea that the Australian dollar going down is positive for resources makes some sense, but history says it usually is not,” he said.
Bankwest chief economist Alan Langford said the recent change was not out of the ordinary during the currency’s unusually long period of stability since around the start of 2011.
Mr Langford said there were very earliest signs of a winding back of US stimulation, and foreign holdings of the Commonwealth bonds had eased from their historic peaks in the September quarter.
“The real test for its (the Australian dollar’s) capacity to hold at or near parity comes when the Fed actually does stop buying Uncle Sam’s bonds ahead of unwinding its balance sheet and ultimately raising the funds rate,” he said.
“But neither of those is imminent, so it is probably too early for exporters to break out the champers just yet.
“Nevertheless, neither should they or anyone underestimate the Aussie’s capacity to fall sharply well before what you thought would be the trigger for a depreciation is pulled.”
