Watch the Trade Account And the Dollar's Surge

There are going to be a lot of losers and some winners as the dollar gallops towards 90 cents US, and then towards the magic level of parity with the greenback.

Look at the next story for a rough idea of the damage a stronger dollar is doing to $A returns from the higher gold price. A lot of exporters are feeling similar pain.

The AMP's chief economist, Dr Shane Oliver reckons parity is somewhere ahead in the next few months.

But given the way the Aussie ploughed ahead after the Reserve Bank rate rise this week, it could come sooner.

Driven by cheap money from the Fed, the Bank of Japan, the Bank of England and theEuropean central banks, the Aussie is a darling plaything of the carry trade investor, large and small.

It is also a proxy for commodities and will rise as the US dollar falls.

The US dollar will continue falling because the silly billies in the markets are worried about inflation and all those greenbacks.

What they should really be worried about is all those dollars being printed and stagnation (not inflation) as the US economy continues (like Japan's, Europe's and the UK's) to operate at less than full capacity: around 75%-80% in many industries.

That is pressing down on costs, not boosting them.

The fall in the value of the US dollar will have no impact simply because exports are weak because foreign demand is weak and the rising cost of imports will have to be eaten by US companies and importers because there is no pricing power at the moment.

Unemployment (as we saw last Friday) remains miserable for Americans with wages hardly growing, working hours cut to a record low of 33 hours a week. 

No wonder the Fed chairman, Ben Bernanke continues to warn Americans that the recovery won't feel like one because unemployment won't improve for years.

So what's all that to do with Australia and the dollar?

It's why the Aussie dollar will remain weak, because not only do we produce and export commodities which are in demand in China, India and other emerging economies, but we do so efficiently, have good laws and our growth prospects (and therefore returns) are better than most other economies at the moment.

Hence the demand for the Aussie dollar, both for investment and finance reasons and good old fashioned speculation.

The Reserve Bank knows that, but in its post rate rise statement, it skated over the impact on our trade account, except a brief mention about slow growth in the tradeables sector (i.e. exports).

So stand by for a good, old fashioned current account scare as the Australian dollar continues to rise as it did in the wake of the Reserve Bank rate rise and export income comes under more pressure.

The dollar hit a new 14 month peak around 89.20 US cents as gold soared to a new all time highs, thanks to a fall in the value of the US dollar (due in part to the RBA decision), but mostly to that strongly denied report in The Independent newspaper in London that oil producing states were pushing to drop the greenback as a pricing currency.

We saw Tuesday the damage the stronger dollar has done to the trade account, with the value of imports down (this will feed through into lower inflation which the RBA would like to see) and lower export income (this is adding pressure to the fall already happening in exports because of the recession and the fall in the prices of iron ore and coal).

The RBA admitted that interest rates have risen for many borrowers because of higher fixed home loan rates and risk margins for business borrowers. It also admitted it prepared to wear the damage to the export account (or tradeables, as it termed them in the post meeting statement yesterday).

"In addition, the exchange rate has appreciated considerably over the past year, which will dampen pressure on prices and constrain growth in the tradeables sector.

"These factors have been carefully considered by the Board."

But Australia's export income has shrunk by a third from its peak around October-November last year and by 25% since last September. 

The exchange rate a year ago was 88 US cents; it fell to an average of 66 US cents, and has rebounded this year. Currently it is up around a third from those lows. The ABS computed the August trade figures using an exchange rate of just over 83 US cents.

The RBA has already warned that the terms of trade would worsen because of the slump and the downturn in prices, but it would seem from previous comments, it had been looking for the lower exchange rate to cushion that for a bit longer than it actually has.

Its own commodity price index for September revealed a 2.7% fall after a 0.2% drop in August.

TD Securities Global markets chief strategist, Stephen Koukoulas got stuck into the RBA's decision for this very reason in an opinion piece in the AFR yesterday.

He said the "glaring omission" from the RBA statement "was the specific mention of exports".

"With exports accounting for 20% of Australia's GDP and the world economy an important element of the RBA's more upbeat view, it was a curious point to gloss over".

"Just hours before the RBA lifted rates, the international trade data confirmed the news that Australia's exports had collapsed, falling by more than a third from peak levels a year ago.

"While the RBA noted the exchange rate had appreciated considerably, which will constrain growth in the sector, the free fall in exports must be one of the biggest risks to the RBA's view.

"On top of this, the RBA Governor conceded in his statement that there had already been a defacto rate rise because of higher fixed home loan rates and risk margins on loans for business, plus the impact of the higher exchange rate.

"Interest rates facing prospective borrowers on fixed-rate loans have already risen to some extent, as markets have anticipated a higher level of the cash rate.

"For many business borrowers, increases in risk margins will still be occurring for some time yet.

"Unemployment has not risen as far as had been expected. The weaker demand for labour over the past year or so nonetheless has seen a moderation in labour costs.

"Helped by this and the earlier fall in energy and commodity prices, inflation has been declining, though measures of underlying inflation remained higher than the target on the latest reading.

"Underlying inflation should continue to moderate in the near term, but now will probably not fall as far as earlier thought."

That's the subtext for the decision: inflation wasn't crushed by the slowdown because it was too shallow. Now we have to lift rates and use the appreciating exchange rate to do the job.

So, the likes of major miners such as Newcrest (the Australian dollar has risen faster this year than the rise in gold prices), OZ Minerals, etc will be hit. 

Those pricing in US dollars, such as Fortescue, BHP Billion and Rio will benefit, but when they convert back to Australian dollars (or Rand, or Canadian dollars) they will feel the pain. Lihir Gold is another whose business will be disrupted.

Coal exporters like Macarthur Coal and oil exporters like Woodside, Santos and the like will feel the pain as well as they restate their US dollar exports and sales into Australian dollars.

But with the string of huge resource projects to be built, a stronger dollar will ease the construction costs, especially on imported materials and equipment.

Rural exporters like GrainCorp, ABB Grain, AWB and Gunns will take a hit because the Australian dollar value will be reduced.

So for many miners and others there will be swings and roundabouts. US dollar debt will become cheaper and repaying it will be easier. Banks should benefit from that.

Car importers and retailers will do well. Car exporters like Holden and Toyota will feel more pain.

Retailers like Harvey Norman, JB Hi-Fi, Wesfarmers (Coles Group and Bunnings), Woolies, Myer and David Jones will all see a big drop in the cost of imports.

That could make Christmas a bit easier than it now seems.

The car importers and retailers and the big retailers who import will have a bit of margin to play with if sales growth slows. If it's strong, earnings could be fatter than now projected.