The Aussie dollar’s plunge in offshore trading on Friday night will dominate local markets when trading resumes today after it hit the lowest level for more than two and a half years.
The currency ended at 71.89 US cents, the lowest since January 2016 when global commodity prices were tanking, taking the dollar with it (iron ore hit a low of $US37 a tonne for example in January 2016).
The currency hit a low of 71.81 in late New York trading. The dollar fell more than 1.6 US cents last week – a drop of 2.2% in five days as the US dollar rose on a renewal of Donald Trump’s trade tensions between America, Canada and China.
In fact around half of that fall (0.8 of a cent) happened from the close here on Friday afternoon to the close offshore on Saturday morning. In fact the Aussie dollar fell by 4.6% in August.
The slump in the value of the currency didn’t impact futures trading for the ASX 200 which ended up 26 points on Saturday morning, pointing to a stronger start to physical trading.
The slide in the currency could see prices of major exporting companies in resources and other commodities in demand such as a2 Milk, Bellamy’s Blackmores, BHP, Newcrest, Oz Minerals.
If the slide in the currency is sustained, it will pressure import dependant companies to start pushing up prices (they have been forced to swallow some of the price pressures from the falling dollar up to now). It could also see other banks lift home loan rates in coming days.
Retail stocks such as The Reject Shop, Coles, Woolies, Myer, Big W, Kmart and Target all depend heavily on imports for many of their product lines. Caltex and Viva, two oil/petrol focused stocks will also be hit, as will car importers like AP Eagers and Automotive holdings.
The sharp fall will help offset (in Aussie dollar terms) a slide in the value of quite a few commodities last week such as copper, gold and iron ore (and in August).
The AMP’s Chief Economist, Dr Shane Oliver said in a comment at the weekend “We continue to see the $A trending down to around $US0.70 as the gap between the RBA’s cash rate and the US Fed Funds rate pushes further into negative territory as the US economy booms relative to Australia.”
The RBA won’t move rates at its meeting tomorrow (but the US Federal Reserve will at its two day meeting at the end of this month) so the Aussie’s weakness will continue.
The move by banks, led by Westpac, to lift mortgage rates will keep the RBA on the sidelines for well into 2020, according to an increasing number of economists. growth is forecast to be around 0.6% to 0.8% quarter on quarter and around 2.8% annual for the 2017-18 financial year.
If consumer spending slows as the wealth effect diminishes thanks to falling house prices (and high levels of household debt), don’t be surprised to see pressures rise for a rate cut in 2019.
The confusing outlook makes this week’s release of second quarter GDP even more important than a historical look back at economic activity in the June quarter.
Last week saw the ASX 200 index rose 72.2 points, or 1.2% last week, hitting its highest level since December 2007 on Thursday, before falling 32 points on Friday to close at 6319.5. The market was up 0.6% for August.
