Some markets react more quickly to fundamental changes than others. For example, the trans-Pacific air fare market is already showing the impact of the rising Australian dollar/falling US dollar, but the Australian stock market seems to be ignoring it.
The foreign exchange market develops its own momentum from time. Once the forex jocks set a target, they tend to get there. The Aussie’s target is now parity, something TD Securities’ Stephen Koukoulas thinks will be achieved in mid-to-late 2008 for these reasons:
- The Australian economic boom continues. GDP growth is entrenched above 3.5% and is likely to hold above 4% right through 2008. Inflation is being unleashed and the labour market pressures will only get tighter, adding to already precarious inflation risks.
- Future interest rate hikes will support the AUD with a further hike (the tenth in this cycle) all but certain. The chatter unfolding suggests a very real risk of a 7%+ cash rate in 2008.
- The commodity price cycle shows few signs of turning, again, a bullish point for the AUD.
- Export growth remains firm – the AUD around current levels is no impediment to the export sector.
- U.S. economic sluggishness and interest rate cuts from the Fed point to some USD softness, at least in the short term.
Which is all very nice for Aussie tourists – and Qantas. Even in the February low season, the Roo’s el cheapo “on sale” seats to LA now cost more than $2K on plastic.
But it’s not so nice for the growing band of globalised Australian companies with significant US dollar income – and I don’t mean the obvious mining types that have a natural hedge as US dollar commodity prices tend to rise as the greenback falls.
The Diplomat gives its list of Australia’s top 100 foreign exchange earners another run in the August edition, demonstrating the preponderance of non-resources companies. The full list requires a subscription, but the top 10 are free.
No prize for guessing BHP and Rio come in as one and two, but who would you pick in third place? Probably not Lend Lease. Or QBE in fourth, or Amcor, NAB, Brambles, PaperlinX, Rinker and Qantas filling out the rest of the 10.
The list is well out of date, being mostly June 06 numbers, and not all carry heavy US dollar exposure e.g. NAB’s foreign income is mainly quids and kiwi, but you get the picture. And there are plenty of others for whom the greenback component of their income is particularly high even though totals dollars might not be massive eg. Billabong.
Which all means there is a forex sleeper lurking behind the records being set daily on the ASX. Just as well rampaging bulls don’t give much thought to dividends – or maybe investors will get free passes to Gracelands instead.