MARKETS SPECTATOR: Dollar delay

Citigroup says there has been a lag in the positive effects for business as a result of the weaker currency, but that bottoms lines may soon start improving.

Citigroup’s Australian economist Paul Brennan says the Australian dollar’s slide has taken him by surprise. Brennan had a end of year forecast for the Australian currency being at 95 cents against its US dollar.

The Australian dollar’s plunge to US94.36 cents, as of 1502 AEST, from being above parity to the greenback as recently as May 10 has probably taken business by surprise, says the Citi analyst. That’s why the positive effects of a weaker currency have yet to be felt as not only is it too soon but business has been nervous the dollar would reverse course and climb above parity, he says.

But if the dollar continues to trade around these levels, or fall even further, Brennan forecasts that by August company bottom lines may be boosted, particularly stocks in the health care and mining sector which will get probably see better revenue once US dollar sales are translated into Australian currency.

Other sectors of the stock market that may be helped by the Australian dollar’s slide are contractors and developers as well as manufacturers. Eventually, retailers and local hotel and resort operators may see the benefit of a weaker currency as fewer Australians go overseas for their holidays, instead staying at home and spending their money in the local economy, says Brennan.

Citigroup says the Australian dollar may fall to US90 cents within the next 12 months. Brennan thinks there is only a “10-15 per cent” chance that the Australian dollar reaches or trades above parity to the US currency because the American economy and its currency seem in a stronger state than emerging markets, particularly China where Australia sells most of its exports.