Aussie dollar relief stymied by exchange rate hike

Just after breaking through the A$0.90 vs the US$1 floor, the currency exchange rate has made a bottom A$0.89 to the US$1, and began to tick back up above $0.90. The weakened confidence in the Australian economy and a series of interest rate cuts gave Australian retailers and exporters a little reprieve from the high Aussie dollar.

That changed when the RBA announced no change to the cash target rate upon which interest rates are based on. Another interest rate cut was expected since the economy was still not reacting as expected to the recent stimulus. Weaker commodities markets were being felt in the overall market, and it was hoped that they would do the work of the RBA to make the financial environment more conducive for business.

Even if interest rates weren’t cut now, the wording of the RBA’s remarks didn’t indicate it would step in with further cuts in the near future. Forex markets took this as a sign that the cash rate loosening cycle was bottoming out based on a stronger economic outlook, and now the exchange rate has turned back up.

In the first week of September, the Australian Bureau of Statistics released new data showing the June quarter GDP growth was 0.6%, creating an annualised 2.4% GDP growth. This quarterly figure was upwardly revised, which made the financial markets take more notice.

The rise in the exchange rate will affect domestic retailers like The Reject Shop (ASX: TRS), David Jones (ASX: DJS) and Harvey Norman (ASX: HVN) who rely on import goods, because their import costs decrease in relative price when the Aussie dollar is stronger.

On the other hand, companies like James Hardie (ASX: JHX) which export or produce goods overseas, will see profits decrease because they become relatively more expensive in price, losing price competitiveness, as well as the company recording smaller profits when earnings are translated back into Australian dollars for reporting purposes.

Foolish takeaway

The economy still needs to improve, and retail and housing industries, key drivers of the economy, are still not realising the levels needed to make consumers give a sigh of relief.  This next year is seen as a time when business will be “getting back to business”, yet the added pressure of a high Australian dollar will slow down the recovery.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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