Record high Aussie dollar – implications for property markets

Aussie dollar hits record high

In high demand - Australian currency

On the back of a successful US $29 billion auction of US Treasury bonds, improving sentiments in the local equity markets combined with China’s announcement that it is cutting the export quota for rare earths by 35% in the first half of next year,  the Australian dollar has hit a new 28-year high of 101.98 US cents at 12.45pm eastern daylight time, the highest level since the currency was floated in the early 1980s.

As a result, Australia’s emerging rare earths producers and explorers are enjoying a year-end surge in value as investors chased down their stocks. ASX-listed developer Lynas Corp surged 11% or 17.5 cents to $1.795 while Arafura climbed 13.5 cents to $1.355.

This development is adding more fuel to the strength of the dollar which has been widely seen as being overvalued by many analysts. Local businesses and corporations involved in tourism, education, manufacturing and exports are already feeling the wrath of the Aussie dollar as their products become less expensive in international markets.  The emerging rare earths market will further drive a wedge between Australia’s 2-speed economy whereby the mining and exploration industries are powering ahead with strong sales performance whilst the rest of the economy is lagging behind.

Job activity, increase in new property sales and the influx of new workers in some mining towns are already putting pressure on prices of certain type of properties. Investors have started investing in these towns some of which have seen house and land package developers increasing prices as each new phase is rolled out. Property markets across Australia will become even more fragmented whereby there will be an increasing number of suburbs and locations with strong growth, plateauing and declining, all at the same time albeit at varying degrees. Interest from overseas investors have declined steadily as the dollar grew from strength to strength.

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Aussie $ hits another record high

International currencies

Quantitative easing in the US, or more commonly known to the layman as “printing money” has sent the Aussie dollar soaring to a new record high against the greenback at US$1.0176. The currency was worth half a US dollar just nine years ago.

The Federal Reserve announced yesterday that it will pump a further US$600 billion into the US economy by buying Treasury bonds over the next few months. This move is in addition to some US$2.6 trillion already spent in trying to kickstart the waning US economy since the Global Financial Crisis.

Interest rates in the US are already close to zero percent which is a similar situation to most countries in the developed world. As the Australian economy continues to strengthen on the back of strong trading with its majors partners in China and India, The Reserve Bank of Australia took the conservative move on Tuesday 2 November 2010 to increase its cash rate by a further 25 basis points, its first since May 2010 and its seventh since September 2010, bring the official cash rate to 4.75%. The RBA said key factors affecting this prudent measure included:

  • The global economy grew faster than trend in the year to June 2010
  • Expectations of a slowing Chinese economy have lessened recently
  • Most commodity prices have firmed after earlier falls during the year
  • Demand for labour has continued to firm and envisaged further strengthening based on trends in job vacancies.
  • The terms of trade are at their highest levels since the early 1950s and is reflected by the strong exchange rate

HSBC said emerging markets and commodity exporters such as Australia are opting for “quantitative tightening” to offset the effects of quantitative easing in the US, which is causing a flood of money to flow into faster growing economies.

Meanwhile, India’s central bank has also tightened monetary policy by raising interest rates by 25 basis points to 6.25%. It has imposed draconian housing curbs to reduce “excessive leveraging” and prick the bubble, limiting mortgages to 80% of property values.

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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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