The Reserve Bank of Australia continues to talk the Aussie dollar down in order to help the economy in its transition. Although the wording in its official communication has softened somewhat from it being “uncomfortably high” to remaining high by “historical standards” the message is still clear – the RBA wants a lower Australian dollar.
This is generally seen as a positive for manufacturers, the tourism sector and those reliant on export revenues. So far as the theory goes, a lower Aussie dollar can help make locally manufactured goods more competitively priced when compared to imported goods. In reality though things aren’t so simple.
Benefits: cost v price
A drop in the Aussie dollar will, eventually, make imported goods more expensive; however, this will not necessarily translate to the same increase in business for the manufacturer. What it can do is actually increase their costs without a noticeable rise on the other side of the ledger. As some OzForex clients point out they prefer a higher Aussie dollar given they import many raw materials that go into the manufacturing process.
During the global financial crisis the Australian dollar lost around 40% of its value in just five months. This means importers would have seen supply costs rise 40% in that time, based on the currency drop alone. That’s enough to drive many companies out of business!
The benefit from a reduction in costs can be much more valuable than a more competitive price. A cost-saving goes straight to the bottom line and can have a more immediate impact. A more competitive price will only be of a benefit if the business can attract more customers and sell more product. For most businesses it is generally easier to cut costs by 10% than grow revenue by the same amount.
Given that around 80% of SMEs import, I think the majority of Australian businesses would prefer the Aussie dollar to remain high.
Jim Vrondas is chief currency and payment strategist, Asia-Pacific at OzForex, Australia’s leading international money transfer service. OzForex’s cutting edge technology powers foreign exchange services for 100,000 private and institutional clients across six continents, and the company is a key provider of forex news.