As the good fairy says: Be careful what you wish for
The $AUS has been front and centre of domestic economic considerations since its April zenith last year at $US1.06. Reserve Bank board member Heather Ridout has since reportedly told Dow Jones she hopes the $AUS would fall to US80c to give all Australians “a fair go”, while politicians, senior public servants, business and industry lobbyists are chorusing the line that a weaker dollar “will help the economy”.
But after tapping into newsletter sources, our inclination is to warn people to be careful what they wish for. Because it seems that a weakening currency tends to erode businesses’ and workers’ purchasing powers, and in that process, tends to harm many more Australians that it benefits.
To a disproportionate extent, the high dollar has been blamed for the inability of Australia to make cars economically and to compete globally in other aspects of manufacturing. But alas all too slowly is the nation coming to grips with far more serious problems.
Meanwhile argument rages as to what the true value of the $AUS should be as, with other currencies, it’s swept along in the tide of money flowing back to the United States where the economy is now moving steadily forward as it dispenses with artificial stimuli.
Exit trend of the $AUS
Increasing numbers of Australians are spending greater percentages of discretionary income online with foreign vendors. Already it’s apparent a growing number of Australians buy virtually all their clothing, music, books, implements and instruments in this way at substantial savings. Their Australian purchasing is in some instances limited mostly to groceries. Paid in Australian dollars, they are buying in US dollars, a trend that’s growing.
In an earlier newsletter we pointed out that although Australian online retail sales in the last quarter of last year accounted for only 6.5% of $14.6bn of retail sales, these are expected to continue growing at 10% annually – which is five times faster than projected traditional retail sales.
Prospects of a falling $AUS leave importers of very successful fashion labels singularly underwhelmed. Many importers buy from Asian countries, notably China, because of proximity to fabrics and high degrees of manufacturing technology. But the Asian vendors require the Australian importers who are tendering $AUSs, to buy in $USs, so that any drop in the $AUS lessens margins for profit in Australia’s already tight retail market.
But worst hit by a falling $AUS are individuals, small business people and indeed most Australians whose global purchasing power falls with it – and for that matter it’s by no means evident that it benefits most big companies.
Economists appear to agree however – as does the Australian Chamber of Commerce and Industry which represents some 300,000 SMEs – that a falling dollar would help the country move away from dependency on resources.
Winners and losers
In this event, beneficiaries would appear to be education providers, trade exposed manufacturers and tourism, but a survey of Australian businesses last September when the dollar dipped 12%, showed that a third were negatively affected.
Some two-thirds of wholesalers and half of retailers who responded to the survey said they were negatively affected by the dollar’s decline, probably because they lost pricing power and accordingly their margins took a beating.
Eminent Australian economist Max Corden is one who eschews conventional wisdom; as the dollar goes down there’s necessarily a net gain for the country.
Ray Attrill, co-head of foreign exchange at National Australia Bank has said he’s inclined to believe our currency isn’t overvalued, and he’s sceptical about Heather Ridout’s wish for a retreat to 80c.
Indeed he asserts that models that try to determine so-called “fair value” for the $AUS based on interest rate differences, commodity prices and other economic variables, suggest the currency should be worth “north of US90c.
What will be will be
Truth be told there’s precious little anyone in Australia can say or do to push the $AUS into the position they believe it should be in to represent what they perceive as its correct value.
It’s been as high as it’s been, for as long as it has because the Australian economy survived the GFC in better shape that practically any other. Unlike Australia, most countries have spent recent years lessening the worth of their currencies by printing money.
And though governments or would-be influential people and organisations may elect to say and do stuff, whatever they say or do may at the most affect what happens to the $AUS by half a per cent. While it’s the fourth most traded currency in the world, it only accounts for about 7.6% of about $5.3 trillion in daily foreign exchange turnover.
We at Macks Advisory can’t help wondering therefore whether the Australian Government really believed that in giving the Reserve Bank $8bn as “ammunition” to influence the currency, that this could actually do anything worthwhile in the context of a $400bn daily trade.
It seems to us the government’s biggest worry – as it is for the Reserve Bank – would have to be the potential for rising consumer price inflation with its implied need to impose higher interest rates as a curb.
Although no prudent business operator should embrace a business model dependent on the dollar’s rise or fall, the fact remains that many owners do tend to rely too much on judgements they make on the basis of what they perceive as a trend in the dollar’s value. And what that means if they’re wrong, is that they try then to absorb the mistake in their price structure for customers’ benefit. When this goes on for too long, shrinking profit margins eventually put these operators out of business.
So what now?
As we said earlier, we believe the $AUS will continue to be swept along in the current of money flowing back to a resurgent American economy that’s shrugging off past need for resuscitation by printed money. In which event it’s difficult to see our dollar doing other than falling a bit more in the short to medium term.
Difficulties stemming from the high dollar have been inflicted upon many Australians, but the imposition has also had the effect of putting pressure on parts of the economy to become more productive. This has accelerated a decades-old relative decline in certain local manufacturing that in some instances could only be regarded as a good thing.
There’s even a school of thought that maintains the dollar hasn’t stayed high enough long enough to force a shift away from inefficient industries that dull the nation’s competitive edge in a global market.
Be that as it may, the fact remains that a substantial drop in the dollar in the all-over scheme of things will not necessarily be the automatic cause for celebration that many Australians expect it to be.
For more information, contact Macks Advisory on 08 8231 3323 or call into our office at Level 11, 99 Gawler Place, Adelaide SA 5000.
