Currency to ease below US$ parity?

Jon Condon, 21/09/2011


While the export industry in recent times has become conditioned to operating in a currency environment in the US105-110c range, there are some encouraging noises being made about a possible decline to parity or even below.    

Yesterday the A$ slipped to the mid US101’s before recovering a little to 102.64c this morning. That’s the best it has been for exporters since mid-March.

There were predictions circulating around banking circles yesterday that the A$ may fall below $US1 within days – and stay there.

Since climbing above US110c in early August, the dollar has weakened as the European debt crisis rattled global markets and the Reserve Bank has softened its tone on the need to push interest rates higher.
The A$ shed another half-cent yesterday, after credit ratings agency Standard & Poors surprised the market by downgrading Italy's sovereign debt rating.

The dollar received a boost from the RBA's minutes of its September meeting on Monday, interpreted by traders to suggest less chances of a rate cut. After the minutes were released late morning, the dollar jumped more than a third of a cent to US102.3c.

But Westpac chief currency strategist Robert Rennie told the Sydney Morning Herald yesterday he couldn't see anything on the horizon that would keep the dollar from back-tracking to parity.

"Europe is heading towards a recession, US economy is heading towards a double-dip recession and Asia is slowing. That makes the A$ less attractive," Mr Rennie said.

While some market watchers earlier said the Aussie could rise to US120c or higher, it seemed the forces weighing on the dollar had overpowered those pushing it higher.

Mr Rennie said it could now drop as low as US95-97c by June next year.
"As we move into October-December, we're going to see the low moving to the US95c level with US101-102c at the upper-end of the very volatile swings we're seeing at the moment," he said.

Westpac’s September monthly bulletin says forces likely to drive the currency over the remainder of the year and into 2012 will include:

  • The response of the US Federal Reserve to the ongoing parlous state of the US economy, and the labour market in particular.
  • Australian monetary policy.One of the biggest drags on the dollar has been the diminishing chance of an interest rate hike. Speculation is mounting that the Reserve Bank will cut rates to spur a slowing economy in which confidence – both for businesses and consumers – is fragile.
  • Until recently, the Australian dollar had been quite resilient to the turmoil in Europe, however markets were now focussing on the relative health of the European and US financial systems. That indirect boost to the US$ was undermining the A$.
  • After a sharp downward adjustment in Westpac’s 2012 global growth forecast last month, it has again lowered its forecast to 3.3pc for September. Weaker global growth next year would weigh on the A$.
  • The A$ would continue to be affected by the outlook for growth in China. Restrictions on credit to Chinese developers and investors would impact on China’s growth.

“The Australian dollar’s core fundamentals remain strong – positive interest differentials; a strong banking system with a diminishing reliance on offshore funding; a trade surplus; and ongoing interest in A$ assets from foreign central banks and sovereign wealth funds,” Westpac chief economist Bill Evans said.

“Companies are slowly coming to terms with the reality of dealing with an average A$/US$ around parity, rather than the much desired, but increasingly nostalgic 75¢,” Mr Evans said.

Beef processor view:

Nippon Meat Packers Australian senior executive Stephen Kelly said while any attempt to predict currency movements was ‘fraught with danger” any sustained downwards move in currency value would obviously be of considerable value to Australian exporters.

Any decline in Australian currency value could conceivably flow back in terms of higher returns to the producer sector, but perhaps more importantly, a stronger US currency would also make US beef exports less competitive, he said.

“That’s the area where the real benefit might be seen, and particularly for grainfed product, where the US and Australia are going head-to-head in markets like Japan and Korea,” Mr Kelly said.

“With the US currency where it currently is, it is very hard for Australian grainfed beef to compete on price in Tokyo or Seoul,” he said.

“Obviously all currencies move around, but in a general sense, our beef export competitors, whether it be South America, New Zealand or others, tend to move in unison against the US$. Therefore, we could say to ourselves, the advantages may not be so great, because everyone would get the benefit from a higher US currency. However, the US, by having a stronger currency itself, would give Australia an advantage.”

In the US domestic market, obviously any US currency movement would have no benefit for Australian beef, but a lower A$ would still benefit Australian exports.

“But grinding meat now tends to move into a lot of other markets than the traditional US supply, so that impact is going to be dissipated. Obviously currency has made that more possible, but I don’t foresee Australia rushing back into grinding meat supply to the US, just because the A$ might get lower,” Mr Kelly said.

The shift away from the US was part of a longer-term, more fundamental trend, rather than something driven just by currency.

“It is linked more to improvement in living standards and wealth in other markets in comparison with the US, and when that happens, protein consumption increases,” he said.

Asked whether Australian cattle prices would rise further if the A$ continued to soften against the greenback in coming weeks, Mr Kelly said it was “certainly a possibility.”

It often took time for the effect to flow back, however. Sometimes cattle price related a lot more to supply and demand than they did to currency value or spot selling prices.

“If the general trend is to be a lower A$, then obviously that could translate into higher cattle prices. But whether the A$ sits slightly above or even slightly below parity, I think we will have to deal with that for quite some time,” he said.

“It’s hard to foresee a return to a US70c currency, given where our interest rates and economic situation on a global comparison are. Although having said that, as recently as 2009, after GFC had set-in, the currency did in fact go under US70c for a time.”


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