The Australian dollar’s tentative push to new highs around US81 cents in the past week is looking like an uncomfortable warning to exporters of what’s potentially in store in the year ahead.
A weakened US currency continues to work against the Reserve Bank of Australia’s (RBA) hopes of restraining the local exchange rate in US70 cent territory.
While nothing is certain, particularly in the US at present, currency observers, including those at Commonwealth Bank of Australia (CBA), believe farmers should brace for the exchange rate to reach US84 cents or higher by year’s end.
HSBC bank’s foreign exchange pundits even tip the Aussie to climb to US90c by mid next year.
On the other hand, the National Australia Bank (NAB) is still betting our dollar could slip back towards US70c by December.
Watching clouds, not currency
For many farmers, however, concern about currency trends is running well behind their more immediate worries about the weather.
Victorian Farmers Federation president, David Jochinke, said while his state was blessed with a generally good season so far, the wider industry tended to be more focused on, and frustrated by, production issues rather than marketing challenges such as a rising, and less competitive, dollar.
NSW Farmers treasurer and Trangie district mixed farmer, Peter Wilson, agreed a rising dollar was disappointing for farm export prospects, particularly given the already depressed state of global grain markets.
“But it’s all a bit academic for a lot of graingrowers, particularly in NSW and Queensland, because Australia’s unlikely to have a big harvest to export this year,” he said.
“I’d actually be surprised if the exchange rate does lift towards 90c given the economic figures from the US are reasonably positive, and if that trend continues the US dollar will strengthen, not weaken.”
Our dollar has been slowly gaining momentum against the US greenback for two years, rising almost 18 per cent since January 2016, including 4pc since July.
After dipping as low as US68.2c early last year, it struck above US80 cents in late July and again late last week.
If it hits US90c next year the rally would represent a 32pc gain since 2016.
The recent rebound has been helped by signs of stronger northern hemisphere economic conditions outside the US, and stronger hard commodity prices.
According to HSBC, other factors likely to fuel our dollar’s next run include its expectations of tightening interest rates in Australia, starting early next year, although NAB does not expect rate rises until 2019.
NAB pointed to political turmoil in the US, disappointing US economic data, and a seemingly wavering Federal Reserve mood on interest rate rises as pulling the American currency down at present, but it believed the impact on Australian exporters may not linger.
Agribusiness economist, Phin Ziebell, said NAB expected the dollar to be around US75c by Christmas, and about US73c for much of next year.
However, the bank said its forecast (particularly for the third quarter) “has substantial upside risks”.
Aside from the weaker US dollar’s recent influences on our agricultural export earnings prospects, Mr Ziebell said deteriorating seasonal conditions hurt NAB’s latest Rural Commodities Index report.
The outlook for prices in the coming year is highly dependent on the course of the Australian dollar
Only four of the 28 commodities profiled in the index rose in August, sending it down 7.6pc – its biggest monthly fall since 2010.
“The outlook for prices in the coming year is highly dependent on the course of the Australian dollar,” Mr Ziebell said.
CBA tips the exchange rate with the US to be US85c by December, based on expectations of interest rates rising in countries other than the US, and moderately rising global inflation.
The bank believed a strengthening synchronised global economy was typically bullish for Australian dollar.
At the same time fiscal policy inaction by the Trump administration, particularly in the area of promised cuts to US company taxes, would continue weakening the US dollar against Australia’s currency.