THE Australian dollar’s continued rise has sparked warnings of currency-driven earnings downgrades in the coming weeks as businesses count the cost of its surge.
Analysts are split on whether the Reserve Bank will drop the official cash rate to stop currency speculators and help domestic businesses or increase the rate later in the year.
As the Aussie yesterday hit a new post-float high of $US1.1011, analysts and fund managers predicted downgrades from companies with high foreign earnings or trade-exposed businesses.
Foster’s, Brambles, ResMed, CSL, Aristocrat Leisure, QBE and News Corporation were among the companies most likely to be hit by a strong dollar.
Alongside weak domestic economic conditions, the higher dollar is another headache for many ASX-listed companies because it erodes foreign revenue and strengthens competition from imports.
Goldman Sachs dealer Richard Coppleson said markets were bracing for bad news from companies exposed to the currency and weak consumer spending posed another challenge.
”Offshore earnings are going to be under pressure, there’s no question about that,” Mr Coppleson said.
”It might be an ugly period in the next couple of weeks and I think the market is bracing for that,” he said.
Explosives and chemicals company Orica’s chief executive, Graeme Liebelt, said his company was losing about $3 million in profit for every cent gained by the dollar over the greenback.
Headwinds from the local currency took $17 million off Orica’s first-half profits, which came in at $264 million to the end of March.
Mr Liebelt said Orica had tried to hedge itself against a strong currency as much as possible, and would have lost closer to $7 million for every cent gained by the dollar had it not hedged its position.
Analysis from RBS has found pharmaceuticals, healthcare and food and beverages tend to underperform the wider market under a higher dollar.
On the other hand, mining and energy stocks remain relatively unaffected by the dollar because higher commodity prices are offsetting the currency’s rise.
The dollar’s negative effect on companies is fuelling speculation the Reserve Bank could cut the cash rate or sell Australian dollars on the open market to provide some relief.
The chief investment officer at boutique funds management firm Evans and Partners, Mike Hawkins, believes an interest rate cut is the only way the Reserve can help businesses outside the resources sector.
”I think an easing now will provide some confidence and relief to that large chunk of the economy that is under a lot of pressure and will smash the currency speculators,” he told BusinessDay.
Cutting interest rates would not encourage inflation because the recent 3.3 per cent rise was partly driven by cyclone-affected shortages, Macquarie Bank analyst Brian Redican said in a note to clients yesterday.
Mr Redican urged the Reserve to intervene in currency markets because the Aussie was rising against many currencies, not only the US dollar.
National Australia Bank’s head of research market, Peter Jolly, said the Reserve was unlikely to cut interest rates if it believed the dollar’s rise was based on genuine economic growth and strength.
”The currency is well supported by this once-in-a-century terms of trade and commodity price story, and even at $US1.10 our sense is that unemployment will continue to decline a little bit,” Mr Jolly said.
But the Reserve was unlikely to increase the cash rate again this year if the dollar stayed above parity, he said.
The managing director of White Funds management, Angus Gluskie, said Foster’s was being hard hit because most of its costs were in Australian dollars.