Sorry farmers - dollar’s downward run has (probably) ended

19 Aug, 2016 02:00 AM
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If you’re perplexed by the Australian dollar’s ability to stubbornly defy expectations and remain remarkably buoyant, you are in good company.

Banking boss Brian Hartzer says the currency pundits at Westpac believe the Australian currency would represent “fair value” at below US70 cents.

Instead it has remained resolutely around US75c or higher for much of the past five months, showing no inclination to venture anywhere near the US65c territory most currency specialists had tipped for 2016.

Farmers hoping for a continuing downward run in exchange rates to help their export competitiveness or buffer them against depressed global grain and dairy prices have been sorely disappointed this year - and many have scorched budgets to prove it.

With the dollar lately trending into US77c territory (almost US10c above its January low point), Westpac managing director, Mr Hartzer conceded it was “getting very hard to predict”.

Although, Westpac’s currency analysts still expect it to trend down again in the next six to 12 months.

Commonwealth Bank of Australia (CBA) is also looking at a drop to a possible US73c average for the Aussie dollar after October, but it also anticipates a rise above US80c next year.

“I’d never say never, but it’s looking less likely to go down below 70c,” said CBA’s agri-commodities strategist, Tobin Gorey.

“Farmers and agribusiness should probably get used to the dollar sort of going sideways rather than the declines or notable fluctuations we’ve seen in recent years.”

However, while agribusiness would be more profitable with an exchange rate in the 60s range, our dollar at US75c was still “not too bad compared to the rate at $US1.10 of four years ago”.

“But even in the current climate there’ll be swings large enough to help farmers and exporters take useful commodity pricing opportunities.

“It will pay to keep a more active eye on what happens in currency markets day to day.”

Westpac’s Mr Hartzer, whose recent meetings with farmers and rural businesses in North West NSW featured a lot of discussion about currency management strategies, said our dollar was being buffeted by overseas events which seemed to have little relationship to the local economy.

The UK’s Brexit vote’s impact on the European currency and business activity, and the US dollar’s limited strength, courtesy of the Federal Reserve’s reluctance to raise US interest rates, were typical factors lifting our currency and making Australia’s record low interest rates look attractive.

Overseas investors wanted safe havens for funds.

Australia was a rare economy offering positive interest rates, which in turn generated money market buying activity and reinforced our dollar.

“I think the RBA really believes the dollar should fall and would much prefer for a lower dollar to do the work needed to get exports moving, but instead it’s bobbing up like a cork,” Mr Hartzer said.

Recent iron ore price improvements had also given the Aussie a lift, although agribusiness foreign exchange specialist with currency transfer firm World First Alex Cook, doubted it would last long.

“I don’t see it staying above US75c too long, but there’s no reason to expect a fall below US70c either,” he said.

“September will be a telling time - the US Federal Reserve may finally move rates up another notch, which should strengthen the greenback.”

Any more signs of a Chinese economy slowdown would also likely put downward pressure on Australia’s trade and currency, but China factors could also erode other currencies.

Meanwhile, Australia’s big ag commodity trade rival Brazil is seeing its heavily devalued currency recover, which could be slightly helpful to our exporters, said CBA’s Mr Gorey.

He said Australia lost red meat market share to Brazil in the Middle East during 2015-16 because the Brazilian real was so competitive, and partly due to our declining availability of export supplies.

“Brazil’s real has become a notable exception in currency markets, rallying against the greenback to levels last traded in July 2015,” Mr Gorey said.

“Investors are growing more confident Brazil’s body politic has reached a point of transformation for the better and the money is following the good news.”

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FarmOnline
Andrew Marshall

Andrew Marshall

is the national agribusiness writer for Fairfax Agricultural Media
Date: Newest first | Oldest first

READER COMMENTS

Dr. Carter Zaius
19/08/2016 8:42:38 AM

Oh my GOD I was wrong. It was the USD dollar all along.
National's
20/08/2016 3:20:12 PM

Wait for the regionals policy's to kick and nearly all will be begging for a dollar over 0.65. Any time now.
wtf
22/08/2016 5:58:59 AM

Interesting to see that upon leaving his role as reserve bank governor, Glen Stevens admitted that allowing foreigners to buy existing Aust assets does not create new capital for the country and has negative consequences for us. Included in this is the rise in our dollar as a result of this unproductive capital inflow. Why don't these people say these things when they are in their positions of power, why do politicians not discuss these negative impacts, why did GS wait till no longer in the job? stop all unproductive capital inflows (eg offshore borrowing), they raise our dollars value.

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