Australian Businesses Predict More Aussie Dollar Strength

The US dollar index has rallied 5.5% since September as a result of the Currency War every official denies is going on. Relativities have been double -weighted towards the greenback given weak economic data in Europe and the UK and the massive easing program now being undertaken by Japan offsetting positive economic data in the US.

It is unusual in recent context to see the US dollar rise in a “risk on” environment, particularly when the Fed has reconfirmed its commitment to QE3. But exchange rates are indeed relative and not absolute, thus an improving US economy means the Fed is losing in the global “race to the bottom” of exchange rates.

Under normal circumstances one would expect the Aussie dollar to depreciate as the US dollar appreciates, but these are not normal circumstances. It must first be noted that while the US is a major trading partner with Australia, trade is not significant enough to warrant an inclusion in the US dollar trade-weighted index – that which has risen 5.5%. The Aussie dollar exchange rate (AUDUSD) has managed a drop from US$1.05 to just under US$1.02 in recent months but realistically the now longstanding trading range has not much been threatened despite US dollar strength.

The Aussie is still influenced most significantly by foreign finance flows for the ongoing development of major LNG projects, the interest rate differential to negative real rates across the globe, and foreign investment in local stock market yield (just as bank shares). On the flipside, diminishing growth in the local mining sector, lower commodity prices and the failure of Australia’s non-mining economy to show signs of any real recovery have led to the Aussie slipping to the lower end of its recent range, with expectations of further RBA rate cuts a prime driver.

The RBA is nevertheless not playing ball, and it must be noted that last year’s rate cuts had no effect on the Aussie whatsoever. Earlier this year it looked as if the Aussie may just be able to fall back through parity with the US, but now the situation looks different.

Yesterday the Commonwealth Bank issued its latest Aussie Dollar Barometer, which surveys medium-sized local exporters and importers, and the bank was surprised to find earlier expectations of a weaker Aussie in 2013 have now given way to a belief the currency will trade higher as the year pans out. CBA itself is forecasting an Aussie of 1.04 by year end, while survey averages show Australian exporters expecting 1.08 and importers expecting 1.11. There was little variation in expectations, with the bank noting a consistency of bullishness.

Strange, thus, are the attitudes of both exporters and importers towards currency hedging. Importers, who enjoy a stronger currency (notwithstanding the influence of online imported sales price deflation) and thus would hedge against a falling Aussie, are planning to increase their hedges from 63% (average) to 83%. Exporters, who enjoy a lower currency and thus would hedge against a rising Aussie, are planning to decrease their hedges to 54% from 59%.

CBA’s Barometer also reveals expectations of a stronger Aussie are causing the majority of businesses in Australia to alter their investment plans. Importers are lifting their investment plans and exporters are backing off (which may go some way to explaining the seemingly upside-down hedge intentions).

On the exporters’ reduced investment plans, CBA forex economist Chris Tennent-Brown notes many exporters are suffering a loss of competitiveness. “This has had a significant impact on future investment plans,” Tennent-Brown suggests, “with close to half of all exporters indicating that the high Aussie dollar has influenced them to decrease investment spending. This trend has become more extreme as the dollar continues to rise, which should see exporters continue to initiate business measures including cutting costs and boosting productivity”.

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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