A leading broker yesterday downgraded Aristocrat and Fosters Group not because of a worsening in their operations, but because of the impact of the higher Australian dollar.
Credit Suisse said the downgrades were because it had raised its currency forecast for the Aussie to 84 USc for Aristocrat (from 70 USc) and to the same level for Fosters (from 81 USc).
(The Aussie closed at 84.07 in New York overnight after rising above 84.30 here yesterday).
There have been other downgrades by other brokers for currency reasons but coming on the day the Aussie hit the highest level for 17 years of 84.39 USc, it was somehow symbolic.
It closed in Sydney at 84.36c and is up more than 2 USc since last Thursday.
The solid growth figures in the March quarter's national accounts helped boost an already firming dollar as did expectations of a rate rise later in the year.
We saw similar speculation in March and April, but when the March quarter CPI, and then the Reserve Bank's second quarterly monetary policy statement took inflation and interest rates off the agenda, the steam ran out of the greenback and speculators sold it off to around 81 USc or a bit more.
And there remains no hint of rising inflation from the national accounts and it is only a knee jerk reaction of strong growth and lots of jobs and solid retail sales equals inflationary pressures, equals interest rate rise. It's simple and simplistic.
The downgrades for ALL and FGL are symptomatic of the impact many companies face from the firmer Aussie.
Computershare, Cochlear and CSL are others and there's a host of resources companies of varying size. The banks face a currency impact on their New Zealand earnings, even though the Kiwi dollar has nudged its highest ever level since the float more than two decades ago.
A dollar that continues at 84 USc will help trim the impact of oil prices on petrol prices (even more reason for local prices to fall) and it will exert more downward pressure on inflation because the cost of imports will be cheaper.
Driving the gains in the Aussie and the Kiwi is the yen carry trade where borrowings in yen in Japan with very low interest rates are then moved to high yield countries like Australia and New Zealand and invested at 6, 7, 8 or 9 per cent for fat gains.
The Aussie reached its highest level since August 1990, in the immediate aftermath of the release of the March national accounts in the late morning.
On August 24, 1990, the Australian dollar reached a high of 84.8 USc.
The RBA's trade weighted index (TWI) was at 68.1, up from Tuesday's close of 67.7 and the highest in 22 years – the TWI reached 68.2 on August 1, 1985.
The TWI surged to a new high of 68.3 at 4 pm yesterday.
