Australia’s Reserve Bank has said for some time now that the Aussie dollar is too strong on the basis of fundamentals such as the terms of trade, and it’s delaying the much needed transition of growth in the economy at the moment.
The idea that the Aussie dollar is too high at the moment may be true in a single factor model but as NAB recently highlighted there are other factors such as low market volatility at play which are keeping the Aussie strong. Equally on a multi-factor basis the Aussie dollar is towards the bottom of the fair value range – not the top, according to NAB’s currency strategist team last month. It has since fallen.
It is this second point of multi-factor value which might help explain responses to the question about the impact the high Aussie dollar is having on business in the NAB quarterly business survey released this morning.
NAB said based on the survey responses, “…less than 33% of non-farm businesses reported an adverse impact from the AUD (down slightly from Q4 2013), which is a little surprising given the AUD rally since the last survey.”
Highlighting what were the key areas of impact the NAB said that:
Wholesale and retail reported the most improvement, offsetting deterioration in most other industries, suggesting that lower import costs are most important to these firms. Nevertheless, wholesalers are still second most negatively affected by the AUD (behind manufacturing). Fin/ bus/ prop services appear to be most insulated from the AUD, reflecting less import competition and few foreign input costs. Surprisingly, the mining sector reported a slightly lower impact. Commodities tend to be bought and sold in USD, limiting the direct impact AUD has on volumes, but a rising AUD could be expected to have a negative impact on mining profitability by lifting costs and reducing revenue in AUD.
Clearly some sectors of Australian business say they are impacted by the high Aussie dollar but it is falling and lower than many would likely suspect.