Aussie dollar hits parity with greenback

Australian currency

Purchasing power - Australian currency in strong demand

The Australian dollar has hit parity with the US dollar for the first time since it was floated in 1983. The last time the little Aussie battler was at parity, Bjorn Borg was retiring from tennis, the former Soviet Union shot down a civilian Korean Airlines flight 007 for violating its airspace, Bob Hawke was elected Prime Minister and Prince William was born.

The last time the Australian dollar was poised to hit parity was back in 2008 just before the Global Financial Crisis when it was trading at 98.5 US cents. As the GFC unfolded and Lehman Brothers went under, the dollar dived to a low of 60 US cents.

Height of power - Borg in the early '80s

Height of power - Borg in the early '80s

Developments in the US

The continued weakness of the US economy prompted the US Federal Reserve Chairman Ben Bernanke to give the strongest indication that further action is required to stimulate the US economy.

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These measures would most likely involve an expansion of the monetary base, commonly known as “printing money”. This overnight development pushed the local currency to a high of 1.0003 US dollar for a brief spell before easing back to its current level of 98.9 US cents to end the trading week.

A$ & US$ trend What does this mean for local Aussie investors

The dramatic rise of the Aussie dollar over the last few months would mean little for local home owners and investors who own Australian property and derive all their income from Australian sources. In order to capitalise on the strength of the Aussie dollar, they would need to leverage by liquidating Australian assets and purchase overseas good and services which have now become relatively cheaper.

It is certainly a great time for Australians to go on holiday overseas as the strength of the dollar would buy a lot more relative to a few years ago.

Tropical paradise - Balinese villa by twilight

It is also a great time to revisit the proposition of owing that dream Balinese villa when our dollar could stretch so much more, especially in Asian countries where our currency now commands greater respect than ever before.

There are already strong signs that Aussie expats overseas are beginning to sell choice Australian properties to invest elsewhere and this could spell further softening at the top end of the market. The Lochtenberg family who is based in New York have listed 14 Notts Avenue in Bondi Beach with hopes of $8 million plus. The 210 sqm modern apartment overlooking Sydney’s most famous beach was bought for $2.852 million in 2000 and has been rented out for $2,500 a week.

14 Notts Avenue Bondi Beach

FOR SALE: 14 Notts Avenue, Bondi Beach

Impact on corporate Australia

Investors in the equity markets are already bracing for some bad news from some of Australia’s biggest multinationals which have exposure overseas. The impending reporting season will be dampened by exporters and those with significant investments offshore as the strength of the dollar means lower profit forecasts which may ultimately impact share prices.

CSL, the global pharmaceutical company has already issue warning to shareholders that its bottom line could take a $100 million hit due to the strength of the dollar. Goldman Sachs strategist Chris Piddock said the number of Australian companies which are likely to issue profit downgrades over the next few weeks to be the highest over the last five years apart from the period during the GFC.

Corporations involved in agriculture exports, tourism and education may experience a slow down as the dollar drives a wedge between cost competitiveness.

Chief executive of the Australian Shareholders’ Association Stuart Wilson said many companies will focus on risk management and hedging strategies to cope with possible fluctuations in currency and offshore exposure. Companies with large offshore exposures such as the Macquarie Group, Computershare, Ansell and Fosters may be susceptible to profit downgrades.

However, the caution would be to have guided constraint before you pop the champagne on that parity party. The Australian dollar despite its sudden rise to dizzy heights, is still dependant on how world events would unfold such as the crisis in the leading European economies, the US and our trading relationship with China, India and other leading partners. All these events to a large extent are beyond the control of the Reserve Bank and the Australian government. Indeed, the threat of further interest rate rises in the local economy is ever more imminent to control the strength and growth of the local economy.

It should be noted the recent long term average of the dollar is US 75 cents. Being a speculative currency in the eyes of fund managers, the dollar may retreat on the back of a slowing world economy or it may power ahead and beyond parity and stay above the US 1 dollar mark for a long while. In the absence of stronger evidence, Bali is still a great holiday destination to stretch your Aussie dollar but you might still want to hold back and check into that villa and keep dreaming of owning it one day.

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