Pete Wargent blogspot

Co-founder & CEO of AllenWargent property buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place), and CEO of WargentAdvisory (providing subscription analysis, reports & services to institutional clients).

4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.

"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.

"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.

"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.

"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.

"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.

Saturday, 3 January 2015

C'mon Aussie C'mon

Aussie dollar to follow commodities down?

One of the interesting trends to watch in 2015 will be what happens to the Aussie dollar.

2014 was a year in which the commodity price boom came back down to earth with a bump - particularly so the key bulk commodities of iron ore and coal (and how - see the dark blue line!).

The Reserve Bank released today its final Commodities Index for 2014 which showed the weighted index (gold line) declining by a further 3 percent in the month in SDR terms to be 21 percent lower in this calendar year.

Ouch!


Stabilising impact of the dollar?

Theoretically changes in the outlook for Australia may to some extent be reflected in the strength of the currency.

The weakening Aussie dollar may have smoothed the ride a little for the export price of bulk commodities in Australian dollar terms - but as the below chart shows, not all that much!

The good news is that in the month of December the commodity index increased by 1.1 percent in Aussie dollar terms.

But nevertheless the RBA's index is down by 19 percent in Australian dollar terms over the year, driven by a sharp decline in bulk commodity prices. 


The Australian dollar has fallen by nearly 30 cents against the greenback from its 2011 peak and from 89 cents to 81 cents in only the past three months.


Winners and losers

The dollar's decline is a smidgeon of welcome news for exporters and in Australian dollar terms puts the iron ore price at a slightly healthier ~A$87/tonne (~$US71/tonne), reflected in a slightly desperate bounce in iron ore juniors' valuations during the last trade.

Of course there will always be winners and losers from foreign exchange movements, and the merits or otherwise of a prospective depreciation are frequently debated.

A lower dollar would be helpful for the tourism sector and would make overseas trips less attractive in financial terms.

A weaker currency could also potentially make Australian assets more attractive to foreign buyers and accelerate property market gains in certain areas. 

In theory a lower dollar helps manufacturers too as imported goods become comparatively more expensive to those produced locally (although in reality some manufacturers import their raw materials, so the net effect for many may be closer to nil).

Be prepared

Forecasting currencies is often a mug's game (cf. "the world's most accurate currency forecaster" who predicted that the Aussie dollar would be at parity by 31 December) but it pays to be prepared.

It looks possible that the dollar may yet have further to fall to 75 US cents or below, partly because the Reserve Bank rhetoric suggests that the central bank wants this outcome to be so.

Rates may be cut

Futures markets are pricing in an increasing likelihood of interest rates being cut further in the early part of 2015 which may help to precipitate a further decline in the currency.

Note how the February 2015 ASX 30 Day Cash Rate Futures contract is now trading at 97.55 - or an implied yield of 2.45 - indicating a 22 percent expectation of an interest rate cut as early as next month.

Implied yields are holding below 2.15 percent all the way until the middle of 2016, which is likely to be handy news for those on variable rate mortgages.


On the other side of the currency ledger the US economy seems to be recovering, which is brighter news for the global economic outlook. 

If this trend continues, then this too would put downward pressure on the Australian dollar versus the US dollar.

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