Earth movers shake the Aussie dollar

As BHP and other mining companies switch investment away from Australia and towards the US, the Australian dollar will continue to come under pressure.

The Australian dollar is looking very shaky as investors suddenly realise that before too long our currency is likely to fall below parity with the American dollar.

Last night we slipped below $1.02 US cents and lost some recent gains against the euro. Against the US dollar we are down some 3 per cent from the levels of just over a month ago and the 2011 peak of $1.10 is now a distant memory.

In simple terms the two big drivers of the Australian dollar have been the enormous flow of money coming into the country to fund mining investment and the high yields offered by Australian securities.

The mining inflow is still high but it is headed for a dramatic fall as the current big projects are completed and those in the pipeline are mothballed under the weight of Australia's high construction costs and a nervous market in energy commodities – particularly coal, oil and gas. China’s change in direction shows boom days are over (China will spoil Australia's energy equation, February 22).

The American dollar will in time benefit from the big projects that will transform the country on the back if its shale oil and gas discoveries.

Our largest company BHP illustrates the trend.

With Olympic Dam and the Port Hedland outer harbour projects mothballed the group’s two major remaining projects – US shale oil/gas and Canadian Potash – are in North America. Under its new chief executive, BHP plans to improve its efficiency, distribute more money to shareholders and lower borrowing. It will not be spending large sums in Australia (Mackenzie's clean break is bigger than you think, February 25; Sliding doors at Rio reveal BHP's future, February 26).

Our interest rates have come down and, as the extent of the mining capital investment declines become fully appreciated, the Reserve Bank may look to try and further stimulate non-mining capex by lowering interest rates.

And as the Australian dollar falls it makes those looking to buy Australian residential property a little more nervous.

A fall in the Australian dollar is good news for the Australian drivers of employment, including education, tourism and manufacturing. But it will cause some problems because the cost of imports will start to rise.

But for miners and all those with large revenues in US dollars this is good news.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles