Winners and losers as dollar takes a tumble

A report by Peter Switzer in The Australian says that  just when the experts of the money world were boldly predicting parity between the Oz dollar and the greenback, along came the depreciation few expected.

So, what’s the outlook for the little Aussie bleeder, and how should investors respond?

Will Richardson, division director at Macquarie’s currency operation, was asked to explain what in the hell happened. “Apart from expectations that the Reserve Bank of Australia was going to cut rates yet again before the end of the year, there is also the ongoing strength of the US dollar,” he says.

The slowdown of the Aussie economy for many, including a big number of often-quoted economists, looks to be worse than expected.

One chief economist expected the first interest rate cut to be in February or March. An entire team of economists from one bank were tipping two more rate rises before Christmas.

The current consensus is closer to another reduction in October and three official cuts in total by mid-2009. Many thought five cuts were highly likely but there is less support for that now. Did the fall shock Richardson?

“This time a month ago, the market was receiving word that the RBA would cut rates in September,” he says. “This was always going to see the dollar depreciate.

“Granted the decline in the dollar has been substantial and it was not long ago when we were questioning whether it would reach parity, so for it to come back down to US80c is perhaps a little surprising.”

He adds that the dive is deep given that the Australian economy is doing better than most advanced economies, particular the US, whose currency seems to be on steroids nowadays.

Richardson says the carry trade took the currency up and partly explains the plunge. “The unwinding of carry trade has exacerbated the move,” he says.

“With risk appetite especially low and the market pricing in a further 100 basis point rate cut by the RBA by mid-2009, this has made many investors close out their carry trade positions against the Australian dollar. With the dollar falling against the yen, this has also increased the number of margin calls and forced some investors to close out of positions.”

Ah, another case of good old exotic financial products and financial engineering causing problems again for long-term investors.

For those wondering about the carry trade, it typically involves Japanese investors borrowing at low interest rates at home and buying into the Oz dollar. While commodity prices were rising, our dollar defied gravity and the carry traders made nice profits. Those days are over for now.

So, what is Richardson’s Mac Bank crystal ball revealing?

“More short-term weakness, but in the longer term it will depend on the outlook for global growth/commodities,” he says. “Chinese growth and their demand for iron ore/coal, in particular, will be a key determinant.”

He thinks the US dollar will also be key.

“While we do not expect a significant improvement in the greenback in the near term, we do expect it to make a comeback towards the end of the year,” he says.

In simple terms, when global downturn talk turns into recovery, then think our dollar up.

“While you may get an easing in commodity prices, the fundamentals for the dollar remain solid — China continuing to support iron ore and coal prices at elevated levels,” Richardson says. “The short-term range is US75c-US85c.”

For those who forget our history, the long-term average currency value is US75c. Given there’s bound to be six to 12 months of a challenged dollar, what shares come under notice?

Investment adviser Lisa Jarvis, from stockbrokers ABN AMRO Morgans, has done the numbers on the stocks that are the most and worst affected by a slide in the currency.

The following companies should be cheering the depreciation: Iluka Resources, PaperlinX, Alumina Ltd, Felix Resources and Santos.

On the flipside Qantas, Virgin Blue, Goodman Fielder, Computershare and Coca-Cola Amatil were pinpointed as losers as the dollar dives.

Recent experience has seen resource stocks’ share prices rise with the dollar, but analysis shows many resource companies do better with a weaker currency.

“A high proportion of stocks in the mining sector have a negative exposure to a rising Australian dollar,” Jarvis says. “While these stocks often have some degree of natural hedging, a substantial part of their cost base is in Australian dollars while most revenues are in US dollars.”

Jarvis says it is a tough market right now.

“Not long ago there was no better trade than to be with long commodities and short financials, but that’s unwinding now,” she says.

Those looking for good buys as the dollar falls should do their homework.

Import-dependent businesses will feel the pinch while many exporters and import-competitive businesses such as local tourism operators will do well.

A Report by The Mole