Be very careful when looking at companies exposed to the Australian dollar over the next few months, certainly until the December 31 reporting period starts next February-March.
There are going to be a lot of losers and some winners as the dollar gallops towards 90 cents US, and then towards the magic level of parity with the greenback.
Look at the next story for a rough idea of the damage a stronger dollar is doing to $A returns from the higher gold price. A lot of exporters are feeling similar pain.
The AMP’s chief economist, Dr Shane Oliver reckons parity is somewhere ahead in the next few months.
But given the way the Aussie ploughed ahead after the Reserve Bank rate rise this week, it could come sooner.
Driven by cheap money from the Fed, the Bank of Japan, the Bank of England and the European central banks, the Aussie is a darling plaything of the carry trade investor, large and small.
It is also a proxy for commodities and will rise as the US dollar falls.
The US dollar will continue falling because the silly billies in the markets are worried about inflation and all those greenbacks.
What they should really be worried about is all those dollars being printed and stagnation (not inflation) as the US economy continues (like Japan’s, Europe’s and the UK’s) to operate at less than full capacity: around 75%-80% in many industries.
That is pressing down on costs, not boosting them.
The fall in the value of the US dollar will have no impact simply because exports are weak because foreign demand is weak and the rising cost of imports will have to be eaten by US companies and importers because there is no pricing power at the moment.
Unemployment (as we saw last Friday) remains miserable for Americans with wages hardly growing, working hours cut to a record low of 33 hours a week.
No wonder the Fed chairman, Ben Bernanke continues to warn Americans that the recovery won’t feel like one because unemployment won’t improve for years.
So what’s all that to do with Australia and the dollar?
It’s why the Aussie dollar will remain weak, because not only do we produce and export commodities which are in demand in China, India and other emerging economies, but we do so efficiently, have good laws and our growth prospects (and therefore returns) are better than most other economies at the moment.
Hence the demand for the Aussie dollar, both for investment and finance reasons and good old fashioned speculation.
The Reserve Bank knows that, but in its post rate rise statement, it skated over the impact on our trade account, except a brief mention about slow growth in the tradeables sector (i.e. exports).
So stand by for a good, old fashioned current account scare as the Australian dollar continues to rise as it did in the wake of the Reserve Bank rate rise and export income comes under more pressure.
The dollar hit a new 14 month peak around 89.20 US cents as gold soared to a new all time highs, thanks to a fall in the value of the US dollar (due in part to the RBA decision), but mostly to that strongly denied report in The Independent newspaper in London that oil producing states were pushing to drop the greenback as a pricing currency.
We saw Tuesday the damage the stronger dollar has done to the trade account, with the value of imports down (this will feed through into lower inflation which the RBA would like to see) and lower export income (this is adding pressure to the fall already happening in exports because of the recession and the fall in the prices of iron ore and coal).
The RBA admitted that interest rates have risen for many borrowers because of higher fixed home loan rates and risk margins for business borrowers. It also admitted it prepared to wear the damage to the export account (or tradeables, as it termed them in the post meeting statement yesterday).
"In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector.
"These factors have been carefully considered by the Board."
But Australia’s export income has shrunk by a third from its peak around October-November last year and by 25% since last September.
The exchange rate a year ago was 88 US cents; it fell to an average of 66 US cents, and has rebounded this year. Currently it is up around a third from those lows. The ABS computed the August trade figures using an exchange rate of just over 83 US cents.
The RBA has already warned that the terms of trade would worsen because of the slump and the downturn in prices, but it would seem from previous comments, it had been looking for the lower exchange rate to cushion that for a bit longer than it actually has.
Its own commodity price index for September revealed a 2.7% fall after a 0.2% drop in August.
TD Securities Global markets chief strategist, Stephen Koukoulas got stuck into the RBA’s decision for this very reason in an opinion piece in the AFR yesterday.
He said the "glaring omission" from the RBA statement "was the specific mention of exports".
"With exports accounting for 20% of Australia’s GDP and the world economy an important element of the RBA’s more upbeat view, it was a curious point to gloss over".
"Just hours before the RBA lifted rates, the international trade data confirmed the news t
