How To Make Money From A Falling $a

The Sunday Age

Sunday April 2, 2006

RICHARD WEBB

WHAT follows are a few ideas on where canny investors can take advantage of our tumbling currency. While you wouldn't necessarily move on any of these on currency issues alone, it is worth knowing the impact, as in some cases it can be huge.

But remember that currency markets bounce around more than most - they are volatile. So like any investment, you've got to make sure you are on the right side of the fence when the $A is high and get over to the other by the time it's low. But because of this extra volatility, you also need to keep your eye on the ball; be proactive and prepared to move quickly.

ON THE SKIDS

After a year in which the $A tootled along around the same level against the greenback, it is suddenly thundering south. From a high of 75.72 US cents at the end of January, it has fallen 5.4 per cent to yesterday's close of 71.63 US cents in New York, after touching a low of 70.16 on Wednesday.

Why? Economists say there are two reasons. The overriding one is that the interest rate advantage Australia has against much of the rest of the world is narrowing (interest rates support currencies).

Local interest rates have been on hold for more than a year whereas rates in the US and Europe are on the up and most believe rates will soon start rising in Japan.

There is also a temporary negative influence at play. The $A seems to have got caught up in a pounding being delivered to the $NZ following news that the Kiwi economy shrank in the December quarter - the $NZ is down twice as far as the $A so far this year.

HSBC's chief economist John Edwards calls this "contagion from its currency cousin".

AMP Capital Investors' head of investment strategy, Shane Oliver, says there is not a great deal of sense to it other than that global investors find selling the $A easier than the $NZ. Most currency watchers expect the $A will slide further, one expecting 68 US cents in the next month.

BUY THE BIG EXPORTERS

A lower $A makes Australian exports more competitive and increases the return in $A terms for companies who trade their goods in greenbacks. The local resource majors are already experiencing stellar times but a falling $A adds the icing to the cake, as all major commodities are sold around the world in US dollars. CommSec chief equities economist Craig James says the situation is as close to nirvana for Australian miners as it gets.

"Both base and precious metals are near historic highs (in $US terms), underpinned by strong global demand for resources," he says. "But at the same time, the Aussie dollar is weakening, boosting export returns and competitiveness for miners."

The impact can be huge. For example, at its last results Woodside calculated that every 1 US cent fall in the $A added $A24 million to its bottom line, so the latest 5 US cent slide has added $A120 million to its profits. For BHP Billiton, it is even greater - it gains $US60 million ($A84 mil-lion) for each 1 US cent move-ment. Say hello to another $US300 million in annual profit, Chip Goodyear.

BUY THOSE COMPETING WITH IMPORTS

A lower $A makes imported goods more expensive. It's a bad time to buy that imported plasma screen television and electronic goods generally, then. Clothes will also be more expensive as most are made abroad. But for local com-panies that compete with imports it enhances their competitiveness.

Take a look at Pacifica, Futuris, GUD to name a few, but look at selling those whose major costs are $US denominated - for exam-ple Coca-Cola Amatil (it pays for its Coke formula from its US parent in US dollars), or Qantas (its fuel bill is in $US and overseas travel is less attractive).

BUY OVERSEAS SHARES

Fancy a punt on Apple, or General Motors, or Sony, or Google? A fall-ing currency means these shares go up in $A terms even if they stand still in their own currency. You need to make sure the pur-chase is unhedged though, and remember the reverse is also true.

While a lower $A is broadly good for the sharemarket, because 30 per cent of company earnings are generated offshore, it makes Australian shares more expensive for overseas buyers. Don't be sur-prised if a few sell out over the next few weeks.

BUY COMMODITIES

They are priced in $US, and gold, for example, is at a record high in local currency terms - might be time to buy an ingot.

But it's bad news for motorists. Crude oil is also at a record in Aus-tralian dollars, and CommSec's Mr James says motorists had bet-ter start getting used to petrol at $1.25 to $1.30 a litre. A lot of people are changing to a more economic car.

CAN THE OVERSEAS HOLIDAY

The $A is down against most cur-rencies with the exception of the $NZ and the Icelandic krona. Those two locations aside, this means your overseas holiday has just got more expensive. But if you do decide to relax locally, maybe avoid taking a driving expedition. Also, the price of internal flights could rise now as aviation fuel is traded in US dollars.

© 2006 The Sunday Age

Back to News Index | Back to Home