MARKETS SPECTATOR: Divided on the dollar's drop
The sun burnt splendor of the Australian dollar may be over, those on the ‘buy-side’ agree, but they are divided as to what the strength of the US dollar means for the S&P/ASX 200 Index.
For hedge fund manager David Hobart of Blue Sky, the slide in the Aussie from 105.5 in the middle of April to below parity is a shift out of stocks to US short-dated treasury bonds or cash.
“The Australian dollar may be the canary in the gold mine,” says Hobart.
He reckons the Australian stock market may be caught up in a global move to dump long-dated paper, including Australian government bonds, for US short-duration paper or cash. The next leg of such a move of global money may be to take profits from stock markets as yields on the long-end of the curve rise.
“As the US dollar strengthens, equity markets may correct,” says Hobart.
Not so fast, says Matt Sherwood of fund managers Perpetual. He says the slide in the Australian dollar is simply the result of a weakening local economy relative to stronger US economic activity attracting investors out of the Aussie dollar denominated assets and into those of the greenback.
“The majority of the investment boom in resources is over and I expect the Australian dollar to trend down,” says Sherwood.
BT Investment Management’s Chris Caton agrees, he says the days of the Australian dollar trading at above or at parity to the US dollar are essentially over. He has a year-end forecast for the Australian dollar at 95 cents against the greenback.
Caton says the Aussie dollar is overvalued by any analysis he has made. The dollar has been helped by capital inflows associated with the mining boom and investors buying Australian government bonds. “If the (Australian) dollar starts to go it could start to go quickly,” says Caton.
Still, if the Australian dollar weakens from around its current parity to the greenback it may be positive for the market, according to Caton. It will help companies boost their earnings if much of their revenue comes from abroad and make domestic oriented businesses more competitive against foreign rivals.
“There is potential softness for the market but that may come off now that the dollar is trading close to below parity,” says Caton.
To be sure, Caton cautions the S&P/ASX 200 Index is “clearly not cheap.” He has a year-end 5,300 forecast for the index.
Sherwood agrees that companies such as News Corp, Res Med and even some of the mining stocks may benefit from a weakening Aussie dollar as much of their revenue is denominated in US dollars. But he believes that capital inflows will continue into the US financial system as the prospects for the underlying economy are better than Australia’s.
But such views miss the bigger picture, argues hedge fund manager Hobart. The benign view of the effects of global quantitative easing by central banks are now being reassessed by investors, according to Hobart. Inflation pressures are now perceived to be building in Japan and perhaps other countries, prompting long-bond yields to rise.
Investors may be loading up on short-term US dollar assets while they assess their next move, says Hobart. That is not good news for stock markets, he says.
At 1039 AEST the S&P/ASX 200 Index was down 5.29102, or 0.1 per cent, to 5200.80. The Australian dollar was trading at 100.26 versus the US dollar at 1041 AEST, according to ANZ.