Dollar to ride on commodities’ back

THE Aussie dollar jumped through US54 cents when nobody was looking, and optimists are now predicting a Viagra-style performance in the coming months.

The currency is up 5 per cent this year against the US dollar, and has bounced 12 per cent off the all-time low of US47.5 cents touched a year ago.

The main drivers are said to be the fat premium offered by Australian interest rates over US Treasuries – which has led to buying from the Japanese, in particular – hopes of a global trade comeback, and a widening amazement at the strength of our economy, which the Economist magazine calls “The Wonder Downunder”.

The key factor may be the Australian dollar’s status as a commodity-based currency. That should hardly come as a surprise to foreign exchange dealers. But nobody wanted to know about natural resources during the new economy paradigm nonsense. Now something is stirring.

So far this year, the Goldman Sachs Commodity Index has climbed 15 per cent, while Wall Street flounders. The prices of oil and gold have been running hard. Just special circumstances you may say.

My old mate, Hong Kong-based contrarian Marc Faber, does not agree. In 1999, tongue-in cheek, he suggested Bill Gates should sell his Microsoft shares and buy gold. Since then, Microsoft has plunged 40 per cent and gold has gone up 10 per cent.

There has been a 20-year bull market in US stocks and bonds, and an equally long bear market in commodities. In 1980 an ounce of gold would have bought you one unit of the Dow Jones Industrial Index, then trading around 800. Today you would need 350 ounces to buy the Dow. Which asset class is the more overvalued? Some are saying it is the latter.

With gold now over $US300, UK newspaper columnists are beginning to castigate the Bank of England for blowing hundreds of millions of pounds by selling bullion last year at a 20-year low.

Alan Greenspan seems to be in no hurry to raise US interest rates.

Cheap money triggered a heady boom in housing and consumer spending, but the recovery in the corporate economy is a long time arriving.

Marc Faber believes the US will need more monetary stimulation, which may lead to higher prices for goods and services and a migration of inflation out of paper financial assets into commodities such as oil, food and precious metals.

The revival in the Australian dollar is rendering our exports a touch less competitive, and makes imports cheaper.

If importing companies pass some of the benefit along to customers, that will be fine.

If they hog the lot, in an effort to rebuild profit margins, trouble will be brewing on the inflation front. Which is why some economists are bullying RBA governor Ian Macfarlane into hiking interest rates early and often to head off that threat at the pass.

The big dry could bring on a major thirst

WELCOME rain has given most farmers in the State a good kick-off to the planting season. Down the track, the outlook for wheat prices is good, and graziers are still getting top dollar for their wool. But there is one looming problem for agricultural companies that operate nationally.

Reports from the Bureau of Meteorology say that seven of its 11 forecast models point to the development of an El Nino between now and August. For betting men, that means only 6 to 4 odds against the hot dry conditions and potential drought that typify this weather system. Generally, El Nino does not hit us. More often than not, it is parts of eastern and northern Australia that cop the effects of the warming waters in the Pacific.

But there have been exceptions. The El Nino during the second half of 1987 brought drought to much of WA.

The worst on record was in 1982, when a combination of baking weather and high winds culminated in Ash Wednesday in South Australia.

Salomon Smith Barney keeps a barometer in the dealing room. The brokers say, if El Nino occurs, it would affect companies like Futuris, Goodman Fielder, National Foods and, to a much lesser degree, Wesfarmers, which now derives only 10 per cent of its earnings from the land.

On the other hand, a warm winter raises a thirst. That would lift Lion Nathan and Foster’s shares as well as water cooler wallahs Neverfail Springwater, and Coca-Cola Amatil. Place your orders.

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