The Australian dollar needs to fall

The Australian dollar needs to fall

Australia’s triple AAA credit rating, strong commodity exports and high interest rates have meant that many have enjoyed the benefits of a high Australian dollar.

Variously described as the Little Aussie Battler, Pacific Peso and the Aussie Ringgit, the Australian currency has now traded for the longest period of time above parity against the US dollar since it was floated in 1983.

But not everyone is enjoying the benefits, and the longer it remains strong the more the pain will spread. The strong dollar is simply making us wildly uncompetitive.

Our manufacturing is on the decline and it isn’t just in the automotive sector. Iconic brands in retailing such as Allans Music and Darrell Lea, as well as our tourism industry, are on the ropes.

Recently, at a broker lunch, an analyst – lets call him Nick – told me that he had had to pay $95 per person (he has three kids) for dinner on Hayman Island. There were no discounted prices for the kids. By contrast, my recent trip to Thailand saw my group of ten (4 adults and six children) eat a six course banquet at a restaurant on the sand, including cocktails, wine and beer for the adults, for A$100 in total!

The price business pays for fuel in Australia is 70% higher than in the US and 40% higher than in China. Rents in our offices make doing business more expensive than in New York, London and Singapore.

What we are facing is the death of manufacturing. According to some reports cited by Jac Nasser, manufacturing as a share of the economy has fallen by 40% in the last ten years and 20% in the last two years. As a share of the economy it is the lowest of all OECD countries and on par with Cyprus!

The strong dollar has also boosted salaries of miners to the highest in the world, making even that industry less competitive – witness the rapid scaling back of projects, and that has been before the iron ore price declines (as we believe it must).

Australia is enjoying the lowest inflation since 1998, and with the risk of unemployment rising across all sectors, the time has come for the RBA to start acting.

Reduced resource investment from China – which could fall precipitously as China’s economic wobbles increase – will see the upward pressure on the $A ease, but more needs to be done.

Three weeks ago, the IMF announced that it would start reporting individually on $A currency reserves. Since then the $A has fallen three per cent. It needs to fall further.

Without action you need to be even more concerned than we are about the mining industry.

To preserve the international purchasing power of your $A holdings, you should seek and take personal professional advice.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.