The Experts
Investor signposts: week beginning 27 September 2009
A: There are a number of factors. First, the US dollar has been falling, so other currencies have lifted against the greenback. Second, prices of raw materials or commodities – things Australia exports – have risen, so there is greater demand for the Aussie dollar. Third, the strength of our economy, our dependence on China and relatively high interest rates have attracted foreign investors to our currency.
Q: Is the strong Australian dollar positive or negative for the economy?
A: As always, there are both winners and losers when the Australian dollar is rising. The stronger currency is good news for importers and retailers (cheaper imported goods) and the media sector (cheaper foreign content). But the firmer Aussie is bad news for the farm sector and exporters as it make Australian goods less competitive. And the firmer Aussie makes life tougher for the tourism sector (more Aussies go overseas, fewer tourists come to Australia).
For the mining sector the Aussie dollar, may be more neutral as mining and energy prices tend to move in line with the currency. The other interesting point is that the Australian dollar has been moving in line with the share market. The correlation ratio, measuring the strength of relationship, stands at 0.90 over 2009, where a perfect relationship would equal 1.0. Since the start of 2008, the ratio is similarly high at 0.80.
Overall, the higher Australian dollar does act as a brake on economic activity – restraining exports and the tourism sector while encouraging imports. At the same time, cheaper imported goods should lead to a lower inflation rate.
Q: But the firmer Aussie dollar is good news for consumers?
A: In theory, yes. A firmer Aussie dollar leads to cheaper imported goods. However, much depends on the pass-through effect – how much, and how quickly, retailers pass on the savings. If transportation costs are rising, retailers may claim that they have less ability to cut prices. A firmer Aussie dollar can also reduce the cost of overseas travel, especially the cost of accommodation and food while at the same time boosting spending power.
Q: Could the firmer Aussie dollar cause the Reserve Bank to delay hiking rates?
A: Certainly. Since late March, the Aussie dollar has risen by 26 per cent against the greenback, up from US68 cents to US87 cents. And the Aussie has risen even more since early March, up by 38 per cent. In part, that rise reflects a weaker greenback. But the Aussie dollar is actually the eighth strongest currency in the world against the US dollar. If the Reserve Bank was to lift rates in the next few months, it would only serve to push the Aussie even higher, putting downward pressure on key areas of the economy that are in early stages of recovery.
In the coming week, investors should get some greater clarity about the timing of the first interest rate hike. Not only is there a spattering of economic data but there will also be appearances by the Reserve Bank Governor and the Treasury Secretary.
On Monday, the Senate Economics References Committee conducts the second day of its inquiry into the economic stimulus being applied to the economy. The Reserve Bank Governor fronts the Committee at 9.15am AEST while the Treasury Secretary is scheduled to appear at 2.35pm.
Also on the calendar for the coming week is the release of the Final Budget Outcome – the final results for the federal budget in the 2008/09 year. The Government expected a deficit near $32 billion but the final result could prove closer to $27 billion. The Treasurer may not update budget projections, but substantially better-than-expected results are clearly on the cards.
There will also be a number of top shelf indicators to provide direction. On Wednesday, retail trade, building approvals, private sector credit and house price data are all slated for release. The Performance of Manufacturing index is issued on Thursday while the TD Securities-Melbourne Institute inflation gauge is released on Friday.
CommSec expects that retail spending rose by around 0.5 per cent in August. Why do we hold that view? In part because the best forecaster – the Reserve Bank – has indicated that spending improved in the month. From its talks with retailers, the Reserve Bank said that sales “softened somewhat in July but has been better in August”. The Bureau of Statistics figures showed that spending fell by one per cent in July, so the Reserve Bank was spot on with that forecast.
We are also tipping another solid rise in building approvals as first homebuyers take advantage of the generous government grant before it is partially wound-back at the end of this month. Approvals have risen in five of the past six months, and after the 7.7 per cent lift in July, we are tipping a five per cent increase for August.
In the US, the September employment report is the dominating influence over the coming week. On Tuesday, consumer confidence and house price figures are released with the ADP report on private sector jobs and final GDP (economic growth) data on Wednesday. On Thursday, personal income, construction spending and the ISM manufacturing gauge are released. And on Friday, the non-farm payrolls or employment data is released.
The number of US jobs is still shrinking, but at a slower rate. And that trend probably continued into September. We expect that payrolls fell by 150,000 after a decline of 216,000 jobs in August. The interesting question for investors is what if jobs actually rose, not fell. Surprise economic results do happen from time to time and investors should always be on guard.
CommSec has modestly lifted targets for the share market. We now expect the ASX 200 to stand at 4,800 points by end year and 5,100 points by June 2010. One by one, economies are emerging from recession but worries about a ‘W-shaped’ recovery in the US persist given that the actual ‘fundamentals’ of the economy remain weak. The healing process for the banking system is still in its infancy, the US housing market remains over-supplied and commercial property prices are still easing.
The First Home Owners Boost gets scaled back on 1 October. Prior to 30 September, someone purchasing an existing property gets $14,000 while the grant for a new dwelling is $21,000. From 1 October, the grants fall to $10,500 and $14,000 respectively. For a first homebuyer, purchasing an established $300,000 property, the difference between buying on 1 October rather than September 30 is effectively $22 a month extra in term of loan repayments. For buyers to be no worse off, the cost of a $300,000 property would need to fall by $3,500 or 1.2 per cent. Will house prices fall by 1.2 per cent from 1 October? Unfortunately, there is no way of telling. While the first home boost has caused some sales to be brought forward, strong demand and higher prices have no doubt pushed some budding buyers to the sidelines. It’s also possible that there will be fewer vendors offering property for sale after 1 October, thus matching the potentially lower amount of demand.
According to the government’s commodity forecaster, ABARE, the value of commodity exports is likely to slide by almost 20 per cent this financial year. At face value, that suggests bad news ahead for the resource sector. But it all needs to be put in context. The previous year commodity exports soared by over 32 per cent, underpinned by higher iron ore and coal prices. Coal and iron ore prices have come back to earth and so have export receipts.
However, even after the decline, commodity exports in 2009/10 will be the second highest on record and up 57 per cent over the past five years. And the real or price-adjusted level of commodity exports is expected to rise by almost four per cent in 2009/10, similar to last year.
And there is also good news for the farm sector. ABARE expects gross farm cash incomes to soar by almost eight per cent in 2009/10 with net income (excludes cash costs) to soar by 46 per cent.
Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Published: Monday, September 28, 2009
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