More speculative strength in the Australian dollar can be expected as it trades well over83 US cents after the US dollar hit a two year low against the euro and the yen.
The Aussie has hit yet another series of 17 year highs on the way to a close of 83.34 USc in New York early Saturday morning, our time. In early trading Monday it was around 83.50 USc in local trading here.
It’s a combination of that weakness in the greenback, speculation that the strength of the Australian economy that might produce a rate rise at the next Reserve Bank board meeting in around three week’s time and expectations of a jump in demand for the Aussie because US buyers and bankers will need to finance the $A29 billion of so needed if the takeovers of Rinker Group and Qantas are successful.
The continuing rise of the Aussie is starting to have an impact on sentiment about stocks with solid US dollar incomes: such as resource groups like Rio Tinto, BHP Billiton,BlueScope, Oxiana, Iluka, Woodside, Westfield and a string of others in the property and financial sector.
We saw that on Friday when the local market opened solidly but when the dollar ran over 83 USc and kept going in the afternoon, a sell-off in stocks like BHP Billiton, Rio and Westfield, Rinker and others with big US dollar revenues, took the broader market lower.
That sort of instability is likely to be a feature of the market from now until the dollar peaks and starts easing, as it will if there is not an interest rate rise in May or June.
The longer the Aussie remains above 80 USc the less chance rates will rise.
Oil prices were firm last week, commodity prices, especially metals, finished the week with solid rises and they are having an impact on sentiment towards the big resource companies, oil groups and others, but the strength of the Aussie should not be forgotten as a temporary offset in the short term at least.
In his weekly market note, The AMP’s head of Strategy, Dr Shane Oliver said the dollar will now test the August 1990 high of $US0.8405.
“But it’s probable that we are on our way to test the February 1989 high of US0.8950.”
“While the strong $A is a bit of a dampener for exporters and companies competing with imports, the overall impact on the economy and share market is likely to be minimal because the $A is strong only because global growth remains solid and the domestic economy is strong.
“The Australian share market is set to receive a huge inflow of up to $60bn over the next six months – if the Qantas, Rinker and Coles takeovers proceed, as superannuation inflows pick up in response to policy measures last year making super more attractive and as the Future Fund commences investment.
“With no major capital raisings the weight of money will be a very strong force acting to push overall share prices higher. Surging commodity prices are also great news for resources stocks which are likely to see earnings upgrades and are trading at huge PE discount compared to industrial shares.
“Resources are trading on a forward PE of around 11 times compared to the rest of the market which is trading on around 17 times.
“Although the $A is already overvalued at current levels, the favourable interest rate differential and strong commodity prices point to further gains ahead, probably up to the February 1989 high of $US0.8950. This should imply a similar degree of overvaluation to the undervaluation that occurred when the $A plunged to $US0.48 in 2001.”
…………………..
Worries about US inflation got a kick along on Friday with the Producer Price Index rising by more than expected, while the confidence of US consumers fell.
The PPI for one per cent in March after a 1.3 per cent increase in February, according to the US Labor Department.
And the Reuters/University of Michigan’s preliminary consumer sentiment index fell to an eight-month low of 85.3 in April amid expectations thatinflation would worsen.
Economists had forecast the PPI would rise by 0.7 per cent. Core prices, which exclude food and energy, were steady which offset the impact of the rise in the headline rate.
And, the US Commerce Department had some rare good news on the external account: America’s trade deficit eased to $US58.4 billion in February, from $US58.9 billion in January. Imports and exports both fell and imports from China fell to the lowest level since May last year.
Over the year to March US producer prices rose 3.2 per cent compared with a 2.5 per cent rise in the 12 months to February. That was the biggest year-over-year change in prices since August and a sign of just how embedded inflation is becoming.
