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News that the world is still buying our resources put a rocket under the Australian dollar in early May. It also coincided with Australia beginning to emerge from isolation and the restart of the economy. It’s a good news story, but the hardship is not over.
Currencies reflect the economic health of a nation but there are other factors that can take precedence, particularly in times of uncertainty.
For instance, the US has over a quarter of the world’s COVID cases and suffered a quarter of global deaths from the pandemic. It’s also having difficulty flattening the curve as new outbreaks continue to spread across different states.
It’s not alone in that difficulty. In Brazil infections are still on the rise, while South Korea has suffered a surge in new cases, believed to be linked to nightclubs.
That’s not to suggest the world is going backwards, emergence from COVID and the restart of economies is the new norm. But uncertainty remains rife, and that ensures the US dollar retains its safe-haven status and remains the currency of choice to hold.
How to find opportunity
The recent release of March trade numbers revealed a trade surplus of $10.6 billion, much higher than the $6 billion markets expected. In percentage terms, monthly exports rose by the most in 20 years, led by increased shipments in iron ore, gas and coal. There was also a nice boost in rural exports.
It’s the type of news we have been suggesting clients keep watch for, as rallies in the dollar present opportunities to sell Australian dollars and buy safe haven US dollars.
On the morning of May 11 the dollar was trading at US65.36c, following a staged recovery from its low in the midst of the COVID crisis of US57.42c on March 19.
However, it was falling as new forecasts had emerged of an expected government deficit of $143 billion this year, compared to pre-COVID expectations for the government to record a small surplus.
It’s a big number but it also shows how well Australia was positioned to support the economy through the crisis. In terms of dollars per person of population the response has been one of the most robust globally. The ability to have such a strong response is because Australia has been well managed for decades, creating a strong balance sheet capable of providing extraordinary support. The government maintains capability to continue to provide support as the economy emerges from isolation.
There are also the lessons from the past. During the global financial crisis the downturn in the visible parts of the economy were plainly evident, as retail sales and house prices plummeted.
However, the resources sector, which does not generate a lot of general public interest, remained buoyant and continued to support the economy during the severe downturn. It’s was a key reason Australia avoided entering the recession that hit many developed nations, and was able to retain its AAA credit rating.
During the current crisis the resource sector is again providing buoyancy to the economy with record exports.
Benefits of a low dollar
Our exporters are also normally paid in US dollars, so if the Australian dollar is low it means greater profits when that currency is brought back to Australian and converted to local currency.
As Reserve Bank of Australia governor, Philip Lowe, recently noted in a speech – the dollar is acting like a buoyancy raft for the economy, providing support for vital exports markets and encouraging consumption of domestically produced goods.
What to do?
We expect the Aussie dollar to remain at current levels while uncertainty remains the norm, especially as the days of the popular 'carry trade' (taking advantage of differing interest rates between countries) are long over, given the low interest rate environment globally.
Domestic data will lead to swings and provide opportunities to continue to trade Aussie dollars for US dollars. It’s not a case of trying to time the market but taking advantage of opportunities as they arise.
Why switch into US dollars?
If you have a view the worse in the markets is yet to come post COVID
Safehaven status – institutional investors flock to US treasuries and Gold , both denominated in USD during stress in financial markers
Once in the USD, Investment opportunities plenty in the USD space
Currency diversification offers a hedge in the portfolio vs a traditional AU Dollar portfolio. Balance the risk of either currency strengthening/weakening
Mahjabeen is a senior investment specialist for Citi