Exporters are likely to continue to suffer exchange rate pain in the year ahead, with experts predicting the recent strong performance of the Australian dollar is here to stay for the medium to long term.
At 11.40am the Australian dollar was worth US86.48¢, slightly down on yesterday’s US86.72¢ close.
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The strength of the Australian dollar has led the Australian Bureau of Agricultural and Resource Economics to cut to 4% its prediction of the growth in value of Australian commodities exports in 2007-08, the slowest growth rate in four years.
ANZ senior currency strategist Tony Morriss says it is likely the Australian dollar will remain at US85¢ or above well into 2008, although the prospect of further financial market volatility contributes an element of uncertainty to the currency outlook.
“Recent action by the US Federal Reserve gives the impression that US dollar strength is not a priority there and also highlights the fact that there is a lot more downside risk to the US economy,” Morriss says. “On the Aussie side, higher commodity prices are likely to remain positive.”
Others believe the dollar will go even higher. A long-term economic forecast released by NAB today predicts it will reach US92¢ by the middle of 2008, before coming back to more moderate levels in 2009.
NAB attributes the currency strength to continuing economic weakness in the US and growing gap between interest rates there and in Australia.
One export business that could be feeling the pain if the NAB forecast comes to pass is agricultural spraying equipment business Enviromist.
The South Australian SME derives significant export income from the US, but managing director Chris Vasey says it just isn’t possible for a business of Enviromist’s size to follow the daily and weakly fluctuations of the dollar.
“We set our contracts at 82¢ about three weeks ago; we think that will be a fair average over the next 12 months,” Vasey says. “Because we’re small we can’t just go changing prices willy-nilly; it takes a lot of time and effort and the customers don’t appreciate it.”
While forward contracts mean Enviromist is not affected by the current strength of the dollar, Vasey says the business will take a hit to the bottom line if the Australian dollar floats above US82¢ when payment time comes for sales deals being done at the moment.
The very real of risk of further currency volatility has pushed Enviromist to look to establish a defacto hedging option: Vasey plans to establish a US bank account to delay repatriating US dollars when the exchange rate is unattractive.
“We buy some components in the US, so if we can keep some money in an account there and use it for those purchases that will act as a kind of natural hedge,” he says.