THE WEEK AHEAD: Australia’s great currency challenge

The Aussie dollar evokes different emotions and reactions from consumers, investors and businesses. For consumers the high level of the currency is viewed positively, the perception being that it will translate to cheaper international travel and cheaper imported goods.

But the strong Aussie certainly isn’t viewed as an unambiguously positive event by investors and businesses. Retailers benefit from a firmer currency as do media companies. But for those companies with substantial overseas operations, the firmer Aussie dilutes foreign revenues and profits.

And for Aussie businesses more broadly, the higher currency creates challenges for the rural and tourism sectors, manufacturers and exporters more generally.

Some may believe that the firmer currency is a temporary development. Perhaps. But there are a number of factors to consider.

Certainly the Aussie dollar has only recently returned to the US90 cent range after a sojourn to the low US60’s earlier this year. And the currency is being supported by the fact that our economy is doing a lot better than others. Interest rates in Australia are also higher than overseas and are rising. So it is understandable that some may see the firmer dollar as a temporary development while other economies catch up.

But there are also the longer-run factors at work. Australia is arguably the biggest beneficiary from industrialisations underway in China and India. Those economies will place huge demands on the world’s resources in coming years – and many of those resources or raw materials will be supplied by Australia.

Since the Aussie dollar floated in December 1983 it has averaged US72 cents. But over the past three years, the Aussie dollar has been much higher, averaging just under US82 cents. And for a fifth of that time the Aussie dollar has held above US90 cents.

The bottom line is that investors and businesses need to redo their sums. If the Aussie averages US80c or US85c in the future, it will substantially boost prospects and profitability for some firms while actually bringing into question the potential viability of other businesses and even entire industries.

Both the Reserve Bank Governor and Treasury Secretary have warned of the major structural changes that lie ahead for Australia as a result of the industrialisation underway in China. More Australians need to take heed of the warnings.

The week ahead

A week doesn’t go past when the Reserve Bank doesn’t feature somewhere, and that is the case this week. Not only is there a speech by a senior RBA official, but also the minutes of the last board meeting is released.

The speech by Assistant Governor Philip Lowe occurs at lunch today, but to date no topic has been put down for the address. Then on Tuesday the Reserve Bank releases the minutes of its October 6 Board meeting.

Unfortunately we won’t be getting full details on the meeting, such as any reservations or even objections by individual members to lift rates. And given the collegiate approach to taking decisions, there is no formal vote. But the minutes will certainly highlight the key factors that were taken into consideration. Perhaps the latest economic assumptions will be detailed. And investors may get some further sense about how aggressive the Reserve Bank is likely to be in lifting rates now that the crisis is over.

Apart from the Reserve Bank events, there is not much else on the economic calendar. On Tuesday, the September imports data is released. These figures are timely, providing the latest reading on business and consumer spending in the economy. But unfortunately the higher Australian dollar affects analysis of the data as the firmer currency reduces the value of imported goods.

And on Wednesday the September car sales figures are released. The industry data has already been released, but CommSec estimates that – in seasonally adjusted terms – that car sales lifted by 2.5% in the month. Not only would this be the strongest increase in three months but also the fifth rise in car sales in six months. It’s not only the Government’s tax break for small business that is helping car sales but also car affordability – holding at the best levels in 33 years.

Overseas, economic data in the US will be vying for the limelight with Chinese data in the coming week. In China, all the key results are released on one day – Thursday – while the US figures are scattered over the week.

The highlight of the Chinese data is the estimate of economic growth for the September quarter. Analysts expect that the Chinese economy grew by 8.9% in the quarter, well up on the 7.9% annual growth recorded for the second quarter. The range of forecasts in the Reuters poll is from 8.2% to 9.5%. Other data to be released covers inflation, investment, production and retail sales.

In the US, data on producer prices and housing starts kicks off the week on Tuesday. The Federal Reserve Beige Book assessment of economic conditions is released on Wednesday. And the leading indicator series is slated for Thursday with existing home sales data on Friday.

Overall the results should be encouraging. Neither deflation nor rampant inflation is occurring – core producer prices probably inched 0.1% higher in September. Housing starts should have lifted for the fourth time in five months, up 2%. The leading index is tipped to have posted a form 0.4% gain in September. And existing home sales probably rose for the fifth time in six months, buoyed by lower interest rates.

Sharemarket

The US profit-reporting season hits top gear in the coming week with over 440 companies to issue results. Among companies reporting on Monday are Apple and Texas Instruments with Bank of New York, Caterpillar, Coca Cola, Pfizer and Yahoo! on Tuesday. On Wednesday, Boeing, McDonalds, Wells Fargo and Morgan Stanley issue results. Airlines, US Airways and Delta Airlines report results on Thursday together with Amazon and American Express. And Microsoft is expected to issue its results on Friday.

Australian investors will have one eye on the US profit results and one eye on the local annual general meeting schedule. Among companies with AGMs in the coming week are Tabcorp (Monday), Cochlear, Pacific Brands (Tuesday), Fosters, Qantas (Wednesday), Amcor, United Group (Thursday) and Asciano (Friday). Woolworths also releases sales results on Tuesday.

Interest rates

If Reserve Bank Board members had any lingering doubts about the decision to lift interest rates, they would have been well and truly allayed with the consumer confidence results. Aussie consumers took the rate hike in their strides, knowing full well that rates had to lift at some point. Of course the fact that most homebuyers are ahead in their instalments has also meant that the rate hike had little affect on household finances. Add in the fact that wealth posted its strongest gain in over five years in the June quarter and certainly soared again last quarter.

The bottom line is that another rate hike is on the cards for November, and possibly half a per cent. Australians are well prepared for rates to rise, even if it has come a little earlier than some thought. As long as the Reserve Bank gradually lifts rates over time and takes other factors into consideration, like the higher Australian dollar, then borrowers won’t be unduly alarmed or affected.

Currencies & commodities

The US dollar index is at 14 month lows and is only 5.5% away from record lows. If the US dollar was to slide back to record lows, and this was fully reflected for the Aussie dollar, then the Aussie would lift to US96.5 cents. The $64 question is what happens to the US dollar and commodity prices when US rates eventually rise.

Craig James is chief economist at CommSec.