Finally September seems to have been the month when reality hit the Aussie dollar, much to general relief.
The currency ended just over 87.50 USc in local trading yesterday and even managed to survive a fall in the final reading of the monthly survey of the health of Chinese manufacturing by HSBC/Markit. It traded around the same level in US and early Asian trading Wednesday morning.
Normally negative news from reports such as that survey kicks the dollar (and the local stockmarket) lower, but yesterday both survived.
Now the currency is heading into territory where the Reserve Bank and others will be far more comfortable.
In the September 2 statement after the Reserve Bank board meeting, Governor Glenn Stevens repeated this comment on the value of the Aussie dollar.
"The exchange rate, on the other hand, remains above most estimates of its fundamental value, particularly given the declines in key commodity prices. It is offering less assistance than would normally be expected in achieving balanced growth in the economy.”
It was a comment he and the bank’s board have been making for several months as the dollar hovered around 92 to 94 USc, refusing to follow the slide in commodity prices, and the terms of trade lower.
Now, after the 6% or so slide in September, that statement is likely to be changed in next Tuesday’s post RBA board meeting statement from Governor Stevens.
It will likely be qualified by pointing out that the currency is now falling to levels, which if maintained or sustained will be helpful “in achieving balanced growth in the economy”.
$A posts sharp September falls
In fact a sustained fall to around 85 USc or a bit lower, could offset much of the impact from the slide in commodity prices and give investors something to cheer about, especially exporters.
But retailers who have established offshore sourcing operations of their own in recent years to take advantage of the strong dollar and to cut costs by eliminating middlemen, such as wholesalers and importers, will find themselves on the hook for higher import costs.
The big supermarket chains, such as Coles and Woolies have set up offshore sourcing programs, especially for their house brands (as we have seen with Coles’ fresh bread’ which is made in Ireland, Denmark and other countries before being imported into Australia).
These house brands, which the big retailers (not to mention the likes of Target, Kmart, Myer and others) are cheaper and have higher margins and are aimed at boosting retailing profit margins.
But if the dollar’s fall is sustained, those ambitions will be dealt a costly blow and it wouldn’t surprise to see a lot of companies directly sourcing goods, products and services from offshore considering to bring some of those activities back into Australia to cut costs.
Certainly the offshoring of services, such as call centres and help desks will cost more for those companies who have gone down that route (Telstra and the banks and other telcos for example).
The value of imports such as oil products will rise, and all those Christmas goods now on the water will also cost more, along with big TVs, new Apple phones and downloads from Amazon.
But on the plus side, a sustained fall in the dollar to current, or lower levels (approaching 80 USc) will help offset the dramatic impact of the slide in world commodity prices in recent months, led by iron ore, grains, oil and gas and metals.
That is the big plus from the current depreciation and if it is sustained enough past the US Federal Reserve ending its easing program this month and then lifting interest rates in 2015, the weaker dollar could manage to offset the continuing weakness in national income and those terms of trade.
The next four weeks will see a series of tests for the currency as we approach the Fed meeting at the end of this month. A rising US dollar will keep the Aussie lower.
The first test comes Friday night with the US jobless data for September, a few hours after the European Central Bank meets.
