26/11/2013 - 13:11

Dollar dips quietly

26/11/2013 - 13:11


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It has been so long coming, and there have been so many false starts, that most people have missed what looks like the long-awaited fall in the value of the Australian dollar to less than US90 cents, and perhaps below US80 cents.

It has been so long coming, and there have been so many false starts, that most people have missed what looks like the long-awaited fall in the value of the Australian dollar to less than US90 cents, and perhaps below US80 cents.

In recent days, without fanfare, the dollar has dropped from US94 cents to around US91.5 cents thanks to a combination of factors that include a darkening view of Australia’s economic outlook and great uncertainty about future US government monetary policy.

An end to the spectacular pump priming of the US economy by the printing of a vast number of extra dollars promises to unsettle the world, not just Australia, although nobody knows to what extent.

Closer to home we have our own set of problems, that include:

• the shock of the sudden end to the investment phase of the resources boom;

• absurdly high costs compared with the rest of the world, which are frightening off international investors;

• rigid labour market policies;

• generous social welfare spending that sprang up during the resources boom but now looks unaffordable;

• declining workforce productivity;

• serious concerns about the future pace of growth in China, easily our biggest export market; and

• a national government which appears to have fallen out of favour in less than three months.

The list of issues putting downward pressure on the Australian dollar can be capped by the recent activity of the Reserve Bank, which has been trying to talk down the dollar because of a belief that its high value is damaging the economy.

Anyone who has followed currencies knows that it’s probably the trickiest investment class because there are so many factors in play, so many contradictory opinions, and because movements can be exceedingly slow – until there is a sudden lurch up, or down.

One of those sudden movements occurred last week, though what really caused the fall to US91.5 cents is anybody’s guess. The logical explanation is that a combination of factors finally started the slide.

The three questions now are how low will the dollar go, who wins from the fall, and who loses?

On the target, it’s worth reflecting on where the currency has come from, and how fast the move has really been.

Seven months ago (yes, just seven months) the exchange rate stood at $US1.05, meaning we’re already down by around 14 per cent since mid-April.

Roll back five years ago and the exchange rate was US70 cents, and while there are reasons why we might not drop that far in the current currency cycle, there are just as many reasons why we will.

Winners from the process of currency decline that seems to have started include the usual suspects of exporters selling in US dollars, such as mineral and agricultural producers, and inbound tourism operators.

Even goldminers will be breathing a little easier if the currency gets to US70 cents, because at that rate the depressing sight of the gold price at $US1,250 an ounce becomes a more pleasing $A1,785/oz.

Iron ore miners, however, could be the biggest winners because at US70 cents the iron ore price gets interestingly close to $A200 a tonne.

Losers will also be the usual suspects. International travel costs will soar as will the cost of capital goods such as imported cars and equipment.

Investors will also find that the currency can have a significant effect on their portfolio, with companies earning US dollar income becoming much more attractive.

The big building material supplier, Boral, is an example of a stock with deep exposure to the US market. Computershare, a share registry operator, earns more than half its income in foreign currency.

But the sector to be most closely watched in Western Australia will be the iron ore miners, which have been poised for a price correction but might now find that the ‘automatic stabiliser’ effect of the currency shift will preserve their income on conversion to Australian dollars.

In April, when the iron ore price was roughly where it is today, a tonne of high-grade ore fetched around $US135, which converted to $A128 at an exchange rate of $US1.05.

Today, the iron ore price is hanging on to that $US135/t price, but with the dollar down to US91.5, the Australian price has grown to $A147/t.

There’s no point in trying to guess how far the dollar will fall, or how quickly.

The important point is that a significant shift in currency values appears to have started, and will probably run for years as the world’s major economies, especially the US, end their emergency policy settings and seek a new normal pace of growth, industrial investment and job creation


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