Yes, I'm in the same boat as you, but not to the same extent. I'm holding USD and EUR to satisfy MTM requirements, but that's all. Friday and Monday were particularly bad, Tuesday so-so, and I'm not looking forward to seeing currency losses when Wednesday's statement is released in a few hours time.the contrarian in me does not like it when he sees 5 figures in AUD loss on a week due to currency exposure
Aussie dollar a ‘global haven’ as US economy deteriorates
The 15 per cent rise in the Australian dollar in just under four months is not only lowering export revenues and cutting import costs but it is starting to change the behaviour of those Australians insulated from higher interest rates.
This week I met a mortgaged small business person serving affluent clients. The higher mortgage rates are a pain but his clients are accepting much higher prices and suddenly the higher Australian dollar is putting travel to the US on the agenda.
If the currency keeps rising, such overseas travel agendas will become a reality.
Australians need to understand why our local currency has moved from its status of a “battler” to now becoming one of the favourite havens for global currency traders.
In the process it tells us what world currency traders believe is going to happen Down Under. The dollar was languishing around US62c just four months ago and is now hitting the US71c mark. And it shows signs of going higher, perhaps to the US75c cent mark reached last April -that would represent a 20 per cent increase from the October low.
Such sharp rises in our currency are slashing both export revenues and import costs creating traps for exporters and importers.
Those investing overseas unhedged are suffering.
We need to acknowledge that part of the strength of the Australian dollar against the US dollar is a weakness in the American currency.
The US economy is deteriorating and with that deterioration comes lower bond interest rates and an expectation that the US Federal Reserve will lift not interest rates as far as markets had expected.
By contrast, currency traders look at Australia and are delighted to see our annual headline inflation holding at the 7.8 per cent rate while at the same time, unlike the US, many large companies are trading very well.
Some are expecting this strong trading to continue during 2023. To currency traders that means Australian interest rates must keep rising.
In addition, for many traders, the Australian currency is seen as a safe way of betting on China which, having abandoned its harsh Covid restrictions, looks set to have a post-Covid boom. In turn, that will boost Australian exports.
It is also likely that the Chinese will release a large number of the trade embargoes it placed on Australia.
his week moving around a number of enterprises I discovered, surprisingly, that in the building industry demand for basic materials remains very strong and forward orders are high right through until the end of 2023. Government infrastructure helps.
The rate of building cost inflation has slowed considerably and some areas, like steel and timber, there have been price falls. But carbon emission charges on raw materials like steel and cement could change that.
Earlier this week I reported that in the retail sector demand in enterprises dealing with customers outside the depressed mortgage and rent belts, remained strong in January, particularly in Victoria. Climate has impacted NSW and Queensland
And the shortage of labour remains chronic. That means companies have to pay higher salary levels to gain skills and existing staff costs are often boosted by working from home demands.
There is clear risk there be a higher level of wage increases given the 7.8 per cent headline inflation rate.
As the currency traders see it, that means Reserve Bank has no choice but to continue to raise interest rates. But that inflation fighting technique mainly savages just one section of the community - those that borrowed heavily during the property boom on the Reserve Bank-encouraged expectation that interest rates would not rise until 2024.
The pain in that segment of the community will be severe if the Reserve Bank’s official interest rate rises beyond 3.35 per cent as the currency traders are expecting.
Accordingly, to bring down the inflation rate will require torture on this segment of the community that will cause considerable social upheaval and vigorous community demands for big wage rises. And of course that creates a vicious circle. More joy for currency traders bullish on the Australian dollar.
ROBERT GOTTLIEBSEN BUSINESS COLUMNIST
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