Rising Australia dollar has winners and losers

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By Sarah Turner, MarketWatch

SYDNEY (MarketWatch) — As the Australian dollar continues to flirt with parity against its U.S. cousin, strategists are weighing up what the currency’s move means for the equity market.

The Australian dollar /quotes/comstock/21o!x:saudusd (AUDUSD 0.9735, -0.0159, -1.6070%)  reached a 28-year high on Thursday after strong jobs data boosted expectations for an imminent interest-rate rise from the Reserve Bank of Australia.
The currency climbed to around 99.20 U.S. cents, vaulting over a 99.05 cent high set on Jan. 13, 1983. The currency was last at parity with the greenback on July 28 1982, according to CommSec research.

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The Australian currency moved back to 97.99 cents on Friday, as the U.S. dollar gained a bit of traction against most major currencies, while the S&P./ASX 200 index /quotes/comstock/27w!i:xjo (AU:XJO 4,656, +3.79, +0.08%)  dipped 0.4% to 4,671.80.
The Australian stock market has tended to move broadly in tandem with the currency, and when global appetite for risk rises, both the ASX and the Australian dollar often rise.

‘The logic is that the Australian dollar is seen as a growth currency, much as the Canadian dollar and the New Zealand dollar are. Whereas the U.S. dollar and the yen are seen as defensive currencies — they tend to do well in times of uncertainty and worries about the global outlook,” said Shane Oliver, head of investment strategy at AMP Capital Investors.

A rising currency is generally not viewed as positive for companies that generate earnings outside the local market.

“At a very mechanical level, [a rising Australian dollar] has a dampening impact because about 30% of earnings are sourced offshore,” said Oliver. “Over the last month, we’re up about 10% [against the U.S. dollar], which translates to about 3% knocked off earnings for the year ahead,” he said.

However, the commodity sector is one of the main drivers of the Australian equity market and, although it gets almost all of its earnings in U.S. dollars, according to research from Goldman Sachs, it’s cushioned by the current relationship between a sinking U.S. dollar and higher commodity prices.

“[A rising dollar] is not so bad for the mining companies as they have a natural hedge in the form of higher commodity prices,” noted Oliver.

George Kanaan, head of distribution at UBS in Sydney, said “although resources are impacted, typically they would rally in this environment and resources are a big part of our index. The overall effect is pretty neutral. I think only 10% of the companies are impacted,” he said.

Of these firms, many companies are hit by a straight translation impact — for example, companies earning U.S. dollars and changing the currency back to Australian dollars.
Equity strategists at Goldman Sachs wrote that Australian companies that could see fiscal 2011 earnings estimates downgrades of more than 10% include CSR Ltd /quotes/comstock/22x!e:csr (AU:CSR 1.83, 0.00, 0.00%) /quotes/comstock/11i!csrlf (CSRLF 1.78, +0.03, +1.71%) , Foster’s Group Ltd. /quotes/comstock/22x!e:fgl (AU:FGL 6.02, -0.03, -0.50%)   /quotes/comstock/11i!fbrwy (FBRWY 5.96, +0.06, +1.02%)  and Cochlear Ltd /quotes/comstock/22x!e:coh (AU:COH 69.73, +0.95, +1.38%)   /quotes/comstock/11i!cheo.y (CHEOY 35.20, +0.10, +0.28%) .

Credit Suisse strategists downgraded WorleyParsons Ltd. /quotes/comstock/22x!e:wor (AU:WOR 23.46, +0.05, +0.21%) /quotes/comstock/11i!wygp.y (WYGPY 21.82, +0.23, +1.07%)  to underperform from neutral on Friday saying that around 75% of its earnings are generated overseas.

“We estimate every 1 cent of Australian dollar appreciation adversely affects group NPAT [net profit after tax] by $3 million,” they said.

There’s also a possible indirect impact, as rivals located in countries with a relatively weaker currency could start to offer lower prices and gain market share.

“There is an issue of whether you see parallel importing coming in on the cement side and the steel side,” said Kanaan at UBS.

There are some firms that do benefit from a rising Australian dollar, however.
Airlines are leveraged to oil, which is priced in U.S. dollars. When the dollar falls, fuel costs also fall for these firms.

Stocks that could see earnings upgrades of more than 10% include airlines Virgin Blue Holdings Ltd. /quotes/comstock/22x!e:vba (AU:VBA 0.47, +0.01, +1.09%)   /quotes/comstock/11i!vbhlf (VBHLF 0.47, +0.01, +1.43%)  and Qantas Airways Ltd. /quotes/comstock/22x!e:qan (AUAN 2.78, -0.05, -1.77%) /quotes/comstock/11i!qubsf (QUBSF 2.76, -0.04, -1.43%) , Pacific Brands Ltd. /quotes/comstock/22x!e:pbg (AUBG 1.18, +0.02, +1.73%)  and Coca-Cola Amatil Ltd. /quotes/comstock/11i!cclay (CCLAY 24.25, +0.18, +0.75%) /quotes/comstock/22x!e:ccl (AU:CCL 12.13, -0.11, -0.90%) , the Goldman Sachs strategists wrote.

Aussie headed higher?
Westpac economists wrote that they expect continued gains for the Australian unit. They expect the Australian dollar to reach $1.02 against the greenback by the end of 2010 and peak around $1.05 next June.

“The Australian dollar will be attractive to global investors, while the usual threat to the Australian dollar — increase in global risk assessments — is likely to be contained as central banks inject liquidity into the system,” they said.

Meanwhile, Goldman Sachs economists are forecasting that the Australian dollar will climb to $1.05 in the next 12 months. They had a previous target of 86 U.S. cents.
The economists expect weak U.S. economic growth but a resilient performance from countries with smaller imbalances.

“We believe that a world of resilient non-U.S. growth that is awash with U.S. dollar liquidity will be particularly supportive for carry strategies, commodity prices and risk sentiment generally,” they said.