MARKETS SPECTATOR: A two-faced mining dollar

The Australian dollar’s drop below parity against the US dollar is good for those who mine commodities in Australia, isn’t it? It makes their gold, copper, iron ore and coal cheaper for foreign buyers, right? No, says Morgan Stanley’s Stuart Baker. Think again.  

Baker says the Australian dollar-US dollar exchange rate is highly correlated to commodity prices. “The demise of the 'mining boom' brings with it a triple negative, too, in the form of lower prices, lower production volumes and, potentially, deferral of growth projects – and it is the latter two factors that weaken the investment case for resource stocks in general,” says Baker.

The Morgan Stanley analyst says he has history on his side. Between July 16 and October 28, in 2008, the Australian dollar fell 37 per cent against the greenback. The benchmark S&P/ASX 200 Index dropped 23 per cent, oil and gas stocks slumped 38 per cent and material stocks plunged 45 per cent.

Between April 30 and July 6, in 2010, the Australian dollar dropped 12 per cent against the US dollar. The S&P/ASX 200 Index slipped 9.9 per cent. Oil and gas stocks were down 7.7 per cent and materials were down 9.8 per cent.  

Still, Baker’s colleague Brendan Fitzpatrick has 'buy' ratings on BHP and Rio Tinto, stocks which Morgan Stanley rates as having “long life, low cost production and strong balance sheets”. Fitzpatrick also has a buy on Fortescue Metals Group.

At 2:28pm AEST, BHP shares were up 47 cents, or 1.4 per cent, to $34.88.  Rio’s shares had gained 13.5 cents, or 0.2 per cent, to $55.43. Fortescue’s shares had added 3 cents, or 0.9 per cent, to $3.54.

Since May 13, when the dollar closed below parity to the greenback, Fortescue’s shares have dropped 7.4 per cent, Rio’s shares have slid 3.65 per cent and BHP shares have added 1 per cent. The S&P/ASX 200 Index has gained 0.2 per cent during the same period.