THE DISTILLERY: Dollar droolers

Hold the presses, Rate Cut Looms is the new tip for today's Reserve Bank board meeting, according to one of our jotters this morning, although there are still a smattering of murmuring Rate Rise Loomers among the covey of commentators. But the general tone is one of, well, bemusement, at the strength of the Aussie dollar. No longer the Pacific Peso, now the Swissie of the south. For many scribblers it's a role change they are finding it hard to understand and adjust to, and so are many in business.

The Sydney Morning Herald this morning: "Speculation is mounting that the Reserve Bank will cut the cash rate to offset the strong dollar's impact, a week after Australia recorded the highest inflation figure since late 2008. However others argue the dollar's rise, which reached $US1.10 yesterday, is based more on punting in global money markets than solid economic growth, and are still expecting the cash rate to rise in August." Fanciful?

The Australian Financial Review reported this morning: "The Australian dollar has broken through the $US1.10 barrier for the first time since its float in 1983, taking pressure off the Reserve Bank to raise interest rates even though inflation is higher than expected." Another one to ignore what the RBA has said about inflation in the March quarter.

And there are losers, as Fairfax's business pages explained: "As the currency yesterday hit a new post-float high of $US110.20 cents, analysts and fund managers predicted downgrades from companies with high foreign earnings or trade-exposed businesses. Foster's, Brambles, CSL, ResMed, Aristocrat Leisure, QBE and News Corporation were among the companies seen as the most likely to suffer from the strong dollar. Alongside weak domestic economic conditions, the higher dollar presents another headache for many of the ASX-listed industrial companies because it erodes foreign revenues and strengthens competition from imports." Well, Foster's newly separated wine business will be hit, but not the beer rump, News, QBE and ResMed already report in US dollars, so they benefit.

The Australian's David Uren wrote this morning: "The Australian economy is emerging strongly from the first-quarter slump caused by the run of natural disasters locally and in key trading partners. Reserve Bank governor Glenn Stevens is likely to deliver a warning after today's board meeting that the interest rate freeze is "appropriate for the time being" but should not be assumed to be long-term. Since the board's April meeting, the strengthening of the economy has been shown in a sharp fall in unemployment, a strong recovery in business trading conditions and a rebound in business borrowing."

While Fairfax's Adele Ferguson had another bout of hand wringing over the value of the Aussie dollar yesterday: "The rise and rise of the Australian dollar to a 29-year high continues to crank up the pressure on some of the country's key industries including manufacturing and tourism. The Australian dollar hit $US1.10 this morning, with economists now projecting it could easily reach $US1.15 in the short-term as the US dollar continued to weaken and commodity prices continued to soar. While declines in manufacturing and tourism are obvious, what is less obvious is the impact the strong dollar is having on the sharemarket. Foreign investors hold an estimated 40 per cent of equities, and as CommSec economist Craig James pointed out in his latest Economic Insights report, as the Australian dollar continued to soar, foreign fund managers were becoming overweight on Australian equities. The upshot is the higher the dollar goes, the more pressure would be put on foreign investors to sell down their holdings in Australian shares to stay within their index weighting."

And again this morning Ferguson said: "Industry groups will go into lobbying overdrive this week in a last-ditch effort to influence the federal government to provide relief in the budget for industries being battered by the high Australian dollar and weakening consumer demand. Key indicators published yesterday showed that manufacturing was continuing to go backwards. The concern is that while the dollar's meteoric rise will stop the Reserve Bank from raising interest rates today, there will be a less happier outcome next Tuesday when the Treasurer, Wayne Swan, unveils his first budget in a minority government." Begging bowl to this side of the room, please.

The Australian's economic editor, Michael Stutchbury had a simple and interesting explanation – blame Canberra: "But the more fundamental story is that Canberra's structural budget weakness is helping to drive the Australian currency to its new post-float high of $US1.10. The deficit blow-out to be revealed a week from tonight will mean that the budget's bottom line is perhaps two to three percentage points of gross domestic product – or perhaps $40 billion – structurally looser than demanded by the mining boom, our record high export prices and a jobless rate heading below its "natural" 5 per cent level. Instead of being close to $50 billion in the red, the budget already should be building up a solid surplus buffer to stabilise the mining boom economy." Hmm, personally I'd put my money on the weak US dollar as the main culprit. When we had budget surpluses in the last decade, the dollar was nowhere near where it is now.

The various other commentators should read Ian Verrender's effort in the SMH this morning. It's an excellent explanation: "while multitudes of globetrotting Aussies are basking in the warm afterglow of victory, it is worth remembering that a very large ingredient in the formula for our magical success is the sick state of the United States. Oh yes, and don't forget Europe either, or Japan for that matter. In fact, at the moment, global financial markets, and specifically currency markets, are a seething hotbed of instability as uncertainty about the state of the world's biggest economy continues to rattle traders. It is for that reason, as much as any of the multitude of others, the Reserve Bank is likely to hold off on raising interest rates this morning."

The ANZ starts the bank reports today and the AFR forecast that: "Investors will enjoy a bumper dividend haul as the big four banks lift payouts to coincide with a record surge in profits." 

Michael Pascoe wrote on smh.com.au yesterday: "Brokers' expectations for the interim profits from the ANZ tomorrow, Westpac on Wednesday and NAB on Thursday range from a subdued effort by Gail Kelly's mob to a jump of 25 per cent plus at Mike Smith's ANZ with NAB in between, but all will produce big fat numbers measured in billions, bigger numbers than last time round and therefore should be able to promise higher interim dividend payments."

The AFR's Chanticleer columnist wrote: "Orica kicked off the May profit season with a sound result while providing valuable insights into the two biggest issues facing business – the carbon tax and the rising $A." Its more a May reporting tea party in size, compared with the December 30 reports.

And The Australian's John Durie wrote this morning: "Orica's Graeme Liebelt has delivered certainty for a decidedly nervous investor base, which explains the 2.5 per cent increase in his stock price on the back of relatively subdued gains and expectations. Liebelt is in a the happy position of having a clearly laid-down strategy to service the production end of the mining and infrastructure boom, and actually delivering on what he has promised. In a sharemarket that is increasingly nervous about the Australian dollar, and where the appeal to new investors is limited, Orica is a safe haven."

Meanwhile, The Australian's Tim Boreham crossed his fingers before the Orica profit report yesterday, and then let go: "Breathe deep and savour the historic moment: a major resources-related project is running on time and below budget. Orica chief Graeme Liebelt this morning imparted the welcome news that the company's Bontang ammonia nitrate plant in Indonesia – to produce 300,000 tonnes a year – was 80 per cent complete, with costings "well below initial estimates" of $US550 million ($502.2 million). What's more, the NSW Kooragang Island upgrade (to 360,000t) should be completed in July at a cost of $110 million, "equal to our original estimate"."

In his daytime comment yesterday, John Durie wrote on The Australian's website that: "New Woolies boss Grant O'Brien is to get his chance to show his operational skills match his reputed talent for acquisitions with the new Masters Home Improvement stores. The battleground for joint venture partner Lowes is somewhat similar to its home base in the US, where it is losing ground in its fight to gain market share from market leader Home Depot. Home Depot is bigger with annual sales of around $68 billion against Lowes at $US49 billion ($44.7billion), and comparable store sales for Lowes at 1 per cent in the first quarter lag well behind the 4.8 per cent reported by Home Depot. In Australia, Masters will be a start up against an established giant in Bunnings."

This morning, The Australian's Bryan Frith looks again at the Centro argument which continues to burble away: "Disgruntled Centro Properties securityholders who have been pressing the Australian Securities Exchange to rethink its decision to not require securityholder approval for the sale of the group's US assets are becoming restive at the time it is taking. If the proposal goes ahead, CNP securityholders' investments would be fundamentally changed because it would be merged with other entities, massive amounts of new securities would be issued and the existing securityholders would not be amongst the continuing securityholders. For the existing securityholders not to have a say on the proposed US assets sale would make an "absolute mockery" of the ASX listing rules."

Business Spectator's Stephen Bartholomeusz wondered about China's latest grand plan to seize control of the iron ore industry: "There's nothing new in the reports that China wants to reduce its reliance on iron ore supplied by the three major producers, but the ambition looks as unrealistic today as it did when it was stated in China's latest iteration of its five-year plan in early March. In that plan China outlined a three-tiered strategy for breaking the dominance of Vale, Rio Tinto and BHP Billiton over the supply of iron ore to its steel mills. At present those three producers, which control about two-thirds of the global seaborne trade in iron ore, account for more than half China's iron ore requirements. Agitated by the soaring price of iron ore and the shift to the market-related pricing imposed on it by the big producers, China's plan involves a massive increase in domestic production, gaining control over offshore iron ore deposits and a substantial consolidation of its steel-making sector to try to gain improved negotiating leverage."

The Australian also reported this morning: "Chevron has applied to boost planned production at its $43 billion Gorgon liquefied natural gas project in Western Australia by 5 million tonnes a year, arguing that the move will reduce the world's reliance on coal and help to lower carbon emissions. But the move sparked immediate opposition from the Greens, which said Chevron was hoodwinking the state and federal governments by gradually turning the site of the project, Barrow Island, into an "industrial park". Chevron's planned expansion would take annual production at Gorgon from 15 million tonnes to 20 million tonnes by adding an extra processing unit, which is known as a train."

And finally, News Ltd's Terry McCrann looks again at the carbon tax in the Herald Sun: "With the carbon tax, Kloppers et al argue that exporters will be penalised in comparison with competing exporters from other countries that don't and won't have to pay a carbon tax. He is exactly right. Except why stop at exporters? Domestic Australian companies that are trying to compete against imports would be similarly hurt exactly the same way. They have to pay the tax, the imports don't. So again, on Kloppers' logic, they should also be exempted from having to pay the tax. Unless it is also slapped on imports. Except absent a global deal on a carbon tax, that probably can't be done."