Graham Macdonald, MBE
MBMG International Ltd.
Nominated for the Lorenzo Natali Prize
Rates of attrition for AUD
AUD Exchange Rate (vs. USD) and Commodity Prices
One of the factors that has eased the pain of sending money back to
Australia lately has been the strength of the Thai Baht. Thai residents
earning in local currency have suffered nowhere nearly as badly as those
paid in US Dollars (USD) or (God forbid) in Sterling. However, the sustained
rebound in the Australian Dollar (AUD), which started in 2008, may well be
coming to an end and that could bring with it a whole raft of both risks and
Admittedly, I have been calling the end of the latest AUD spike since the
end of 2011. Yet, when currencies form a top or a bottom it is frequently a
process rather than an event.
Before I look at the AUD itself, I will take a slight detour into risk
management. The worst time to have exposure to a stock is when a company is
in trouble. If that company stock is in your pension as well as your
investment account, the problems are even worse. Added to that, if that
company is your employer and because of its problems lays you off,
disrupting your earnings and rendering all your stock options worthless,
then you are really up against it.
I would not suggest to people that they should not invest in their
employer’s stock or hold it in their Super plan but I would ask them to be
aware of the risk. Similarly, there may be risks related to any weakening of
the AUD - what if your employer pays you here in Bangkok in AUD? Your
employer would benefit from that but life in Bangkok will suddenly get much
more expensive overnight for you. On the other hand, if you are paid in Baht
then you would suddenly become much more expensive on any Australian
company’s P&L statement, and your position might be threatened by
In other words, in many of the environments where the Australian economy and
AUD are strong, you are likely to benefit as this carries through into
positive career development opportunities as well. However, with AUD as a
barometer of global economic activity, a weakening currency may well signal
the opposite. That is before even looking at cross-currency liability and
debt situations (e.g. Aussie properties with Yen mortgages which have been a
great idea for the last six months but which would look a lot worse if the
AUD were the currently going rapidly into reverse).
On the flip side, in the face of a weakening AUD, international assets will
start to look more attractive, which could be a much needed positive factor
offsetting the drawbacks set out above - so there is a strong argument that
maintaining a largely offshore foreign currency allocation provides inherent
diversification benefits from an overall wealth standpoint.
With that in mind, it is also important not to over-react to short-term
movements. While much media attention is dominated by the daily zigs and
zags of currency volatility, our focus on underlying fundamentals has been
the key to capturing the big moves over time and adding significantly to
It is common knowledge that China’s construction boom has been the driving
force behind Australian mineral exports. As the chart shows, export
commodity prices have become the dominant driver of the Australian Dollar,
and have led to its doubling in value since 2001. However, while mineral
prices have been the Australian economy’s key strength, they are also its
key weakness, as China moves down an inevitable path of rebalancing away
from physical investment and towards the consumer sector.
Australia’s “two-speed economy”, with growth outside the resource sector
having been weak for some time, makes the country particularly vulnerable to
a slow-down in exports. Along with a reliance on international funding to
support the richly-priced housing market, this raises the prospect of
further cuts to the Reserve Bank of Australia (RBA) cash rate and of
stimulatory Australian government and central bank responses both of which
would put additional pressure on the AUD.
Regardless of how long the AUD stays at these levels, we remain of the view
that it is precariously placed if economic data should disappoint, and
possibly with some catch-up due from the commodity price declines that we
have already seen. As the US Dollar is still seen as the “safe-haven”
currency of choice, minimizing holdings in AUD continues to be a good choice
for Australian investors from a diversification standpoint. All this comes
with the USD likely to rise in value at just the time that commodities and
the AUD are sinking. Property prices will come under pressure and careers
may take some unexpected turns.
The risks of an AUD downturn can be easily hedged against and the
opportunities easily exploited. If you know what you are doing there is the
chance to make some serious gains in your portfolio - even if Australia does
look as though it will be going through a bad period. It is tantamount to
bad risk management not to take advantage of this opportunity!
The above data and
research was compiled from sources believed to be reliable.
However, neither MBMG International Ltd nor its officers can
accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a
result of any actions taken or not taken as a consequence of
reading the above article. For more information please contact
Graham Macdonald on [email protected]
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