By Jill Fraser for Lending Central
As the Aussie dollar surges ahead, marking a historic 27 year high against the $US, the prospective winners and losers buckle up for the ride.
AMP Capital Investors’ chief economist, Dr Shane Oliver notes: “Until the early 1980s, the norm for the Australian dollar was above parity against the US dollar. This ended in 1982 when a secular bear market in commodity prices, a bad track record on inflation and years of poor economic performance knocked the $A below parity.
“But with the terms of trade running around levels last seen in the early 1950s – when one Australian dollar bought $US1.12 – and Australian interest rates well above US rates and likely to rise even further, a sustained rise above parity is likely.
“The surge in the $A will bring winners and losers. Losers are likely to be manufacturers and companies that compete internationally. Mining, energy and agricultural businesses won’t be affected that much as commodity prices have generally risen in line with the strong $A.
“Winners are Australian consumers who will see the price of imported items such as electronic goods, clothes and cars fall in value and offshore holidays get cheaper and companies with large import bills, such as airlines and retailers.”
Oliver maintains that overall the strong Australian dollar is likely to be more positive than negative. “$A strength has normally gone hand in hand with economic strength, in contrast to the lows of $US0.48 in 2001 and $US0.60 in late 2008. To the extend that the strong $A helps control inflation it will also do some of the RBA’s work for it and so interest rates may not need to rise as much as might otherwise have been the case.”
Sal Carrero, Chief Executive, of national accounting firm, Chan & Naylor also states that parity with the greenback will ease inflationary pressures.
Opposition finance spokesman Andrew Robb, who clearly is reading from a different manual than Oliver and Carrero, is calling on the Government to hold a mini-budget before Christmas to address inflationary pressures.
Commonwealth Bank currency strategist Joseph Capurso correctly predicted the $A to break parity with the $US by the end of last week when eight US Federal Reserve speakers meet to discuss quantitative easing.
Herston Economics’ chief economist Clifford Bennett, who has dubbed the Aussie dollar “the Stallion of the currency world” and is the only forecaster to have consistently targeted 96 cents all year, predicts that the $A will continue its run to $1.03 early next year and US$1.08 to US$1.12 in 2012.
Bennett could be forgiven for engaging in a spot of crowing.
“You have to feel sorry for the banks like Goldman Sachs. Please correct me if I am wrong, but were they not saying just a few days ago that the Australian dollar was vastly overvalued and was certainly going back to 79 cents? Yet today a national newspaper has them as the first major house to forecast a move above parity to 1.03? That is a 79 to 1.03 slip, oops small error, and claim to fame, all in one curve ball. Impressive stuff.
“As for Australian banks, well apparently CBA has changed its forecast six times this year, most recently from 88 cents to 97 cents I believe, and that was when the AUD was already at 96 a few days ago. Very brave,” he exclaims.
Talking exclusively to Lending Central Bennett said: “The effect on the mortgage industry is extremely positive. Without a high Australian dollar the Reserve Bank would have been free to hike rates, perhaps significantly over the next twelve months. The appreciating currency is a deflationary force and will ensure the CPI stays in the RBA’s target band. Therefore despite a strong economy, there is no reason/excuse to hike.
“A further raising of official rates would send the currency even higher than would otherwise be the case, and begin to damage our export earnings. So maintaining a stable interest rate environment is now the only course available to the RBA, which is great for the mortgage industry,” he said.
“Wholesale funding costs will if anything be reduced by the higher currency. Overseas borrowings by the banks, which were not currency hedged, will now be easier to repay, and foreign investors will continue to be keen to buy bonds in Australia, benefiting from both a strong yield and an appreciating currency.”
Asked whether he sees any justification in banks hiking rates independently of the RBA, Bennett laughs and admits: “It is not often the Treasurer and I agree, but there really is no justification for additional interest rate increases by the banks.
“The world’s financial markets continue to calm down after the turbulence of recent years, and as they do, the cost of funding will continue to decline.
“Also their rates are a significant factor in how much market share they maintain, I think there is a real competitive price pressure against any individual bank independently raising mortgage rates.”