Exporters to suffer as dollar, wages and rates heading up

Exporters and travel industry operators are likely to face a testing combination of higher interest rates and a rising dollar in the months ahead, economic events today and yesterday suggest.

Yet another sign of the excess heat in the Australian economy came this morning, with new data showing wages increased by 1.1% during the December 2007 quarter – up from 1% the previous quarter, and up 4.2% for the year.

That above-inflation result will reinforce Reserve Bank of Australia concerns that the skills shortage could lead to a wages breakout, particularly since the wage rises weren’t confined to the resources sector.

Although mining wages did continue to grow strongly, retail sector wages also increased by 2.1% in the December 2007 quarter, pushing both sectors to more than 5% growth for the year.

On the interest rate front, a further rise next month is now almost certain – the markets now have the chance of a rise at 92%. A further rise following the release of CPI data in April is increasing in likelihood by the day.

And the double sting in the tail for the export and travel sectors is that the Australian dollar is likely to follow interest rates up, putting further pressure on margins and hitting visitor numbers.

According to Ozforex’s Jim Vrondas, the Australian dollar could go as high as US94c in coming weeks as rates here rise and those in the US tumble.

“Higher rates are providing strong underlying support for the Aussie dollar. The local economy is still powering along and while there is an impending slowdown in global growth we’re not seeing that here, whereas it is has well and truly hit in the US,” Vrondas says.

He predicts the dollar is likely to stay at high levels for at least the next three to six months, and even longer than that if there are no signs of diminishing demand in the economy.

“The tightening of monetary policy will continue over the next few of months, so some of that might start feeding into data in the middle of this year, but until that happens the Aussie will stay strong.”

At 12.50pm the Australian dollar is trading at US91.81c, down slightly on yesterday’s US91.99c close, and the S&P/ASX200 is down 0.5% from yesterday to 5588.8.

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