The Downside In Upside: Aussie Dollar Style

It’s not only the Australian Government that won’t be happy with how the recently risen AUD will affect its fiscal position; a strong dollar could also spark an obvious negative feedback loop for Corporate Australia.

The dollar is trading around $US0.94 this afternoon and 72 on a trade-weighted basis.

As Credit Suisse equity strategist Damien Boey notes in the AFR this afternoon, the market has priced for a lower Australian dollar and the impact that will have on earnings growth.

But a high Aussie and TWI could persist for longer than the market is currently thinking, as the NAB Currency Strategy team suggests.

The market has recently been thinking that the ASX will hit an EPS growth target of 13% for the 2013-14 financial year. But Boey says:

“I don’t think that market EPS growth of 13% will be met over the next year.

Untimely AUD/USD appreciation may contribute to a downside surprise – but really, the issue is that global confidence is now getting a thorough shake from the Fed’s non-tapering.

If global confidence weakens, this could have a dramatic impact on Australian sentiment, spending and earnings.”

Low rates around the world have created the preconditions for a global recovery, which looks like maybe it might be synchronised and potentially enduring.

This is good news for Australian exporters but if the currency rises again and stays high, their then hopes for both an increase in volumes and better Aussie dollar prices might be dashed.

With Australia’s stock market at its highest levels since 2008, that won’t be good news for superannuants and other investors.

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