What a difference one surprise US Presidential election result and a soaring US dollar (which hit 13-year highs on Friday) make to the thinking on the health of the Australian economy.
In the minutes of this month’s Reserve Bank board meeting, the strength of the Aussie dollar was a concern.
"The domestic economy appeared to have continued growing at a moderate pace in the September quarter and the transition of activity from the mining sector to non-mining sector of the economy had continued. Low interest rates had been supporting domestic demand and the lower exchange rate since 2013 had been helping the traded sector. These factors were continuing to assist the economy to make the necessary adjustments, although it was noted that an appreciating exchange rate could complicate this adjustment.”
At the close on Saturday morning that “appreciating exchange rate” was no more. On the day of the meeting, the currency was around 76.50 US cents, and would soon appreciate to a high of 77.62 US cents on November 8, the day of Trump’s election.
On Saturday morning it ended around 73.40 – a drop of 4% from November 1 and 5.4% from the peak on November 8.
It touched a low of 73.25 on Friday night – its lowest since June after hitting that six month high on November 8.
“Expectations for a narrowing in the interest differential in favour of Australia as Fed tightening swings into view are clearly weighing on the $A, which is good news for Australian companies that have to compete internationally,” The AMP’s Chief Economist, Dr Shane Oliver wrote at the weekend.
“The rising $US saw the $A fall below $US0.74 which is good news for the RBA,” he added.
And the dollar will remain weak after strong signals the Fed will lift rates at its meeting in mid-December.
Appearing before the US Congress’s Joint Economic Committee last Thursday, Ms Yellen said that an increase in short-term interest rates could “become appropriate relatively soon”.
And on Friday, New York Fed president Bill Dudley said inflation expectations “certainly seem to be” well-anchored, which helped harden expectations for a rate rise next month.
The Aussie dollar was among the best performing major currencies this year until the US election, thanks to carry trades where investors borrow in safer assets to buy riskier, high-yielding currencies, and the rebound in commodity prices.
But it is now around 40 points above its start of the year level of 73.03, but well above the 2016 low of 68.64 hit 15 days later amid the mad commodity sell off that greeted the start of the year.
Meanwhile, Aussie bonds are resuming the sell-off that was briefly interrupted over the past two sessions, with the 10-year yield rising 15 basis points to 3.719 per cent, not far from the 10-month high of 2.737 per cent hit earlier in the week (bond yields and prices move in opposite direction).
The slide in the value of the dollar will push our terms of trade for this quarter sharply higher (they were already in the black because of the jump in commodity prices – such as iron ore, coal, copper, grains and meat).
If sustained the slide in the value of the dollar will add to local currency earnings for a host of companies, such as beef groups (Aust Ag reports later today), miners, especially small gold companies which operate and report in Aussie dollars.Oz Minerals, Northern Star and Independence Group come to mind, as well as Western Areas.
But big miners, such as Newcrest, BHP Billiton and Rio Tinto won’t because they operate and report in US dollars – and the surging greenback won’t make life easier for them.
The big benefit though from the weaker dollar is the boost to underlying inflation to push it back past 2% by June next year.
In the minutes for the November 1 meeting the RBA said “the boost to the prices of tradable items from the earlier depreciation of the exchange rate was likely to have run its course.”
If the current slide continues and the currency remains around this level, or a bit lower (and it could very well do so given the uncertainty about Trump’s policies once he becomes President), then no more rate cuts and the bank will be far happier as inflation rises.
But wages remain the problem, as we saw last week – 1.9% for the year to September. If wages growth doesn’t pick up 2017 and 2018 could see weak wages growth amid rising inflation – which would out a further crimp on consumer spending, and life much tougher for retailers of all sizes.
