A career spanning more than 40 years in the finance industry has taught Mark Johnson, senior adviser at Gresham Investment House, to appreciate the almighty influence of currency on Australia’s fortunes.
“Currency dominates the Australian economy,” Johnson says. “It’s the number one background issue.” It’s an issue, too, that has persisted through the pre-float era and beyond – a transition that Johnson witnessed. Prior to the 1983 float of the Australian dollar, periodic government re- and devaluations wrenched the economy this way and that. Since 1983 the currency has been subject to the daily mood swings of global markets.
But Johnson is not nostalgic for the past. “The 1983 float was a seminal event,” he says. “It led to the Australian financial services market developing to the sophisticated level it’s now at.”
Over time the Australian dollar has also evolved to become one of the world’s popular trading currencies (the fifth-most traded or 7.6 per cent of daily global currency market turnover, according to a 2010 Bank for International Settlements report) and a proxy for resources.
“The Australian dollar has a huge daily turnover, it’s about the same amount as our entire money supply,” Johnson says. “And that’s not justified by economic factors alone.”
After the float
Whatever the reasons, the widely traded Australian dollar has had a wild, unpredictable post-float ride. It has risen from a low of around 50 cents against the all-important USD in 2001 to above-par highs today.
While the fluctuating dollar has been an ongoing problem for corporate Australia, particularly for the export sector, the currency dilemma also weighs heavily on offshore investment decisions.
“It creates issues for all those in Australia who hold international assets,” Johnson says. Issues the trillion-dollar plus superannuation industry has yet to fully confront. And with super funds likely to increase their offshore allocations as the Superannuation Guarantee rate moves up to 12 per cent, currency management will assume even greater importance.
Volatility & exposure – handle it
Clifford Bennett, chief economist at White Crane Group, has been a strong advocate of hedging strategies for all companies exposed to the vagaries of the Australian dollar.
“Some industries have done it better than others. Mining has been the worst, manufacturing and agriculture have [handled currency issues] better.” Bennett says. “But [all those affected by dollar movements] need to understand how to protect themselves against currency trends.”