Investors welcome hefty drop in the dollar

Weakening domestic demand in China and a subsequent fall in the Australian dollar did little to deter shareholders yesterday, with the sharemarket climbing above the previous day's close.

By InvestSMART · 23 Mar 2012

By InvestSMART ·
23 Mar 2012

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Weakening domestic demand in China and a subsequent fall in the Australian dollar did little to deter shareholders yesterday, with the sharemarket climbing above the previous day's close.

The benchmark S&P/ASX200 index was up 19.4 points, to 4272.7, while the broader All Ordinaries index was up 17.9 points, at 4364.9.

The local bourse enjoyed a sizeable hand from the financial sector, with the big banks accounting for 8 points of the 19.4 point rise. National Australia Bank was the standout performer, gaining 29?, or 1.2 per cent, to $24.39.

China's manufacturing activity slipped to a four-month low in March, with HSBC's preliminary Purchasing Managers Index dipping to 48.1 from 49.6 in February. It marked the fifth month China's manufacturing activity contracted. A reading above 50 indicates industry is expanding, a reading below suggests it is contracting.

The dollar shed more than US1? on the news, after recovering some lost ground of recent days, dropping from US104.88? to a low of US1.03.76?, its lowest since January 20. By 5pm, it had rebounded slightly to US104.17?.

A foreign exchange strategist at ANZ, Andrew Salter, said investors' concerns about an abrupt slowdown in China was largely behind the fall.

"This data is certainly consistent with a slowdown, but it is not consistent with a hard landing," he said. "The Chinese authorities were attempting to craft this sort of outcome anyway, to promote more stable inflation."

Despite the large fall in the dollar, the sharemarket outperformed other stocks in the region. But according to IG Markets strategist Stan Shamu, this was not surprising.

"A high Aussie dollar has been one of the main reasons for the local market's underperformance for a while now," he wrote.

Investment bank Macquarie Group surged 84?, or 3 per cent, to $29.11, while QBE Insurance jumped 28? to $13.90.

Gold major Newcrest advanced 58?, or 2.02 per cent, to $29.35, breaking a three-day decline that wiped 5 per cent off its share price.

The spot price of gold in Sydney was $US1648.90 per ounce, down $US1.70.

Sigma Pharmaceuticals was a standout performer. The company's stock surged 3.5?, or 5.7 per cent, to 65?, after it reported a net profit of $49.17 million for the 12 months to January 31, a marked improvement on the loss of $235.38 million in the prior year.

David Jones continued to decline, losing 3? to $2.40, but rival Myer added 2? to $2.26. Tabcorp rose 1? to $2.67, after raising $250 million from the bond market, part of which will pay off debt.

Meanwhile, Australia's central bank has signed an agreement with its counterpart in China allowing for up to $30 billion to be exchanged between the two banks.

The RBA says the purpose of the agreement between the Reserve Bank and People's Bank of China is to support investment between the countries.

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Frequently Asked Questions about this Article…

Why did the Australian sharemarket rise even though China’s demand weakened?

The local sharemarket climbed despite weaker domestic demand in China. The S&P/ASX200 rose 19.4 points to 4,272.7 and the All Ordinaries was up 17.9 points to 4,364.9. Financials, led by the big banks, supplied much of the lift (about eight points of the ASX200 gain), and strategists noted that a weaker Aussie dollar removed a drag on local stocks.

What caused the fall in the Australian dollar and how big was the move?

The Australian dollar fell after China’s preliminary manufacturing PMI slipped to 48.1, signalling further slowing in activity. ANZ foreign exchange strategist Andrew Salter said investor concern about an abrupt slowdown in China was largely behind the fall. The dollar dropped to its lowest level since January 20 (falling by just over one US cent on the news) before a slight rebound later in the day.

What does China’s manufacturing PMI of 48.1 mean for investors?

A PMI reading below 50 indicates contraction: China’s preliminary HSBC manufacturing PMI was 48.1 in March (down from 49.6 in February), marking the fifth month of contraction. For investors, that signals cooler Chinese industrial activity, which can weigh on commodity demand and companies exposed to China.

Which ASX stocks stood out on the day the dollar fell?

Several stocks outperformed after the dollar slump: National Australia Bank was a standout among the big banks, Macquarie Group surged about 3% to $29.11, QBE Insurance jumped to $13.90, and gold major Newcrest rose around 2% to $29.35. Sigma Pharmaceuticals also rallied after reporting a turnaround to a net profit for the year to January 31.

How did Newcrest and the price of gold react to the market news?

Newcrest advanced (about 2.02% to $29.35), breaking a three-day decline that had trimmed roughly 5% from its shares. The spot price of gold in Sydney was reported at US$1,648.90 per ounce, down US$1.70.

What corporate funding news moved stocks, such as Tabcorp’s update?

Tabcorp rose about 1% to $2.67 after it raised $250 million from the bond market. The company said part of that bond raising will be used to pay off debt, which supported the stock on the day.

What is the Reserve Bank of Australia’s agreement with China and what does it do?

The RBA signed an agreement with the People’s Bank of China that allows for up to $30 billion to be exchanged between the two central banks. The Reserve Bank says the purpose of the arrangement is to support investment between Australia and China.

What should everyday investors take away from a weaker Australian dollar combined with a stronger sharemarket?

From the article’s coverage, investors welcomed the weaker dollar because it removed a performance headwind for the local market—something IG Markets highlighted. Financial stocks were a major source of the market lift. At the same time, analysts warned the China PMI points to a slowdown (though not a hard landing, per ANZ), so investors should note that Chinese demand remains a key factor for market sentiment.