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Sunday, 25 January 2015

Dollar Dunked - "79 Handle"

Dollar dives

It has been a long time coming but it looks as though the backside is finally becoming detached from the Aussie dollar.

The Reserve Bank has been making noises on this very subject for many months, one of the pet themes being that the Australian economy would benefit from a lower dollar.

While there is no straightforward way to quantify what an ideal exchange might be, one might take the Reserve's rhetoric to refer to a dollar which is trading at closer to 70 cents than 80 cents, but there is of course absolute level.

This would be of benefit to some of Australia's exporting industries, particularly mining and resources companies which ship commodities on US dollar denominated sale contracts.

Only ten days ago the dollar had a brief dalliance with 83 cents, but with markets now sensing a soft inflation reading - surveyed economists expect a soft December reading to be revealed on Wednesday - and perhaps a further rate cut, the dollar has dived to only 79.1 cents.


Pain or gain?

Naturally there will always be winners and losers from currency movements.

There are all the usual debates about exporters, manufacturing companies, the tourism sector and the impact on our own individual purchasing power overseas.

I discussed this fairly succintly in a previous blog post here.

Changes in foreign exchange rates have implications for investors too.

Firstly and most obviously, an understanding of which of the industrials will benefit from a dollar exposure can help to guide portfolio allocation in equities markets.

Those who invest in precious metals such as gold and other US dollar denominated currencies also stand to benefit from a declining exchange rate.

Slightly less obviously, there is a valuation impact for foreign investors in Australian assets.

A significant proportion of our equities and bond markets is owned by foreign investors - the percentage naturally shifts over time but may even be somewhere close to half - and a weaker dollar makes Australia's share markets a more mouth-watering prospect than might otherwise be the case.

In today's more fluid financial world there may be a discernible impact on our property markets too.

While the official data may not fully capture the inflows of foreign capital into real estate markets, it is nevertheless true that a lower dollar makes Australian property more attractive to overseas-sourced capital, as well as to Australian expatriates.

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