Drop in Australian dollar not sharp enough to shift growth forecast
The sharp drop in the Australian dollar in recent weeks is not enough to move the dial on economic growth and activity, experts say, although at least one business stands to immediately benefit.
Since pushing briefly above US81¢ in late January, the local currency has suffered a precipitous US6¢ slide to trade just below US75¢ in Thursday afternoon trade - its lowest in approaching one year. The losses have accelerated over the past three weeks.
A faster than expected pace of US rate hikes amid waning hopes of tighter policy in other major jurisdictions - such as Europe and Britain - has been credited for boosting the relative attractiveness of the greenback.
The Aussie has dropped US6¢ in short order as investors have upped their expectations for US Fed rate hikes. Andrew Quilty
One corporate leader cheering on the falling currency has been Corporate Travel Management founder and chief executive Jamie Pherous.
His business is one of the most exposed on the ASX to fluctuations in exchange rates, and the recent US6¢ drop in the Aussie is proving "a tailwind", Mr Pherous said.
Bonus for bottom line
About half of the company's profits are in US dollars or greenback-linked currencies such as the Hong Kong dollar. Another 20 per cent or so is in pounds, making for a "direct translation" from currency movements to the bottom line. Every 1 US cent has a $1 million impact on profits, and every pence move a $600,000 impact, Mr Pherous said.
The Aussie dollar has been "stubbornly high for a long time", Mr Pherous said. "We've done exceptionally well despite that."
The most recent quarterly edition of NAB's influential business survey, released mid-April, indicated Aussie businesses expected an exchange rate at about US75¢ over the following three months, NAB chief economist Alan Oster said, suggesting the dollar at current levels would be the cause of few surprises in corporate board rooms around the country.
Nonetheless, the rapid slide in the Aussie has sent some market analysts scrambling to recast forecasts. CBA chief currency strategist Richard Grace on Thursday said he expects the Aussie to end the year at US78¢, rather than US83¢.
The upgraded spending outlook follows a series of strong business confidence surveys. Louie Douvis
The recent moves in the currency may have been sharp, but Mr Oster said they were not sufficiently dramatic to trigger a rethink of his bank's economic and inflation forecasts. His team estimated a fair value of about US77¢.
Delayed effect
"If you get a large movement in the currency that persists, then it can have an impact," Mr Oster said.
A softer dollar can eventually feed through to the cost of imported goods, lifting inflation through the tradeables component of the consumer price index, which has detracted from overall CPI growth in recent quarters. But the currency's effect on inflation tends to have lags of six to nine months, CBA economist Gareth Aird said.
The Aussie's recent fall is "not enough for us to see inflation genuinely lift because of the currency", Mr Aird said.
Macquarie chief economist Ric Deverell agreed the weakening of the currency "hasn't been big enough to dramatically change the inflation outlook".
"It's helpful, don't get me wrong. I think the RBA will be delighted the currency's come down a bit because it does buy us a bit more growth, but it hasn't been big enough yet to make a real and material change to forecasts I would have thought," he said.
In the statement accompanying its decision on Tuesday to hold rates steady for the 19th consecutive meeting, Reserve Bank of Australia governor Philip Lowe noted the recent decline in the Aussie. But Mr Lowe said the trade-weighted currency index remained within its two-year range, offsetting the idea the decline in the currency was generating a more supportive backdrop for growth.
With Vesna Poljak
The RBA might be 'delighted' about it, but the sharp drop in the Australian dollar in recent weeks is not enough to move the dial on economic growth and activity, experts say. Brendon Thorne
Macquarie chief economist Ric Deverell does not believe the recent falls in the Aussie are enough to move the dial on economic growth. Cole Bennetts
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