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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Sunday, 10 January 2016

8 potential boosts from the lower dollar

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It has been a dreadful start to this calendar year for Australian share markets, with $85 billion in value erased in the last week, and futures markets anticipating yet more of the same on Monday.

Following on from a smashing employment result in the US, the Australian dollar has now declined sharply against the greenback to sit below 70 US cents.

While intuitively many of us like to see a strong Aussie dollar reported on the nightly news - particularly those of us who love to travel overseas! - the lower dollar can help to boost the economy in a number of ways.

It has been a long slow haul, but the dollar has declined from an astonishingly high level of above 110 US cents in the third quarter of 2011 to 69.5 cents today.

Not all of the impacts of a weaker currency are positive, but below are 8 inter-related ways in which the lower dollar can serve as a boost for the local economy (follow the links for more details).

Cheaper exports, expensive imports...(and inflation?)

The rolling annual value of Australian exports has slumped over the past 18 months, driven primarily by a dramatic reversion of iron ore and coal prices after a massive supply response, as well as declines in other commodity prices.

Firstly, and perhaps most obviously, the lower dollar can help to increase the value of particularly US dollar denominated exports

Secondly, imports may slow as they become comparatively more expensive, which might in time serve to improve the trade deficit, of which Australia has now racked up 20 consecutively. The value and volume of imports at last declined a little in November. 

Thirdly, and not dissimilarly, certain retailers may experience a boost as Aussies are discouraged from purchasing goods from overseas, including online consumers.

Annual retail turnover growth is presently tracking at well above its half decade average in growing at 4.3 per cent in the year to November. There can be negative implications of a lower dollar for some retailers too, it should be said, such as those which import raw materials. 

Headline inflation is presently fairly low in Australia, in part related to the sharp fall in oil prices.

A fourth trend to watch is whether the lower currency may in time lead to inflationary pressures - both from increased aggregate demand causing demand-pull inflation, and from more expensive imports causing cost push inflation.

Higher inflation is far from a happy result for everyone, of course, but it can serve as a boon to net debtors by inflating away the value of their borrowings - until such time as interest rates rise, at least - while the lower dollar may also make asset prices appear more attractive to foreign capital. 

Tourism, visitors, and immigration

Fifthly, the lower dollar has already helped to see a record 7.3 million short term arrivals over the year to October 2015, an impressive set of figures which includes a gigantic surge in the number of tourists from China and its provinces. 

Not all visitors come Down Under for tourism, with a sixth unfolding trend revealing that the 2015 calendar year drew a record number of education arrivals into Australia.

Seventh, and penultimately, the flip side to this equation is the gradual slowing of overseas travel by Australians.

There is of course no shortage of us wanting to take a jolly jaunt to Hawaii when the purchasing power of each dollar in our pockets is super-strong, but with the Aussie dollar below 70 cents inevitably more of us will choose to holiday at home, which in turn will serve as a boost to the Queensland economy.

Finally, following a review and subsequent streamlining of the visa process, the current pace of growth in lodged applications implies that 2016 will see another surge in international student numbers, many of whom will end up becoming residents.

A large and increasing number of students go on to apply for second visas and thus find a path to Australian residency. The visa types that students move on to include post study work visas, 457 visas, working holiday visas, permanent points-test and other substantive visas.

Migration experts see this opening up of the higher education field as one of the most productive and effective shifts in economic policy in recent times.

With the relaxation of visa rules in the higher education system and a strong push from Universities for greater access to post study work visas, DIBP forecasts expect that eventually there will come a huge surge in net immigration related to student visas.

In terms of what this might mean for the actual immigration of students measured from December 2014 forth, we could potentially see net immigration of an extra half a million international students into Australia before the decade is out. Lower than previously projected, yes, but still a huge number.

There are more impacts besides, of course, but these stand out as particularly important. If these trends play out then they may serve as a boost to the labour market, which has been robust away from the resources states. 


Key data due to be released later this week includes the Labour Force survey and Housing Finance. Moderate declines are expected by the market for both employment and for the total value of housing loans (where the lines between investor and owner-occupier have become hopelessly blurred).