When will the pain end for Australia's exporters?
For years, Australian exporters endured a dollar that was trading above parity with the US greenback and just when they thought the Aussie dollar was on its way down to provide them with some sweet relief, it has once again skyrocketed to a fresh four-month high of US92.96c.
The recent strength comes as a result of the increasing likelihood that the Reserve Bank's easing cycle has indeed come to an end. While a number of analysts had entered into the year expecting up to two more rate cuts to take the official rate to just 2%, many are now expecting it to remain unchanged until later this year. In fact, some are even now suggesting it could be pushed as high as 3.25% by early in 2015!
The change in tone comes after more upbeat comments from the RBA's chief Glenn Stevens who did not take the opportunity to "jawbone" the dollar downwards at his most recent speech at a conference in Hong Kong. Strengthening views on the local economy and a potential stimulus program in China have also pushed the dollar upwards.
While this is good news for companies in the retail and travel sectors, such as Myer Holdings Ltd (ASX: MYR), JB Hi-Fi Limited (ASX: JBH) or Flight Centre Travel Group Ltd (ASX: FLT), it is not so good for exporters who struggle to compete internationally when the dollar becomes too expensive. According to a recent Citi survey, the "comfort zone" for exporters is at US92c, beyond which they do not feel comfortable to grow their businesses.
The stronger dollar will put further pressure on miners including the behemoths BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), which are already struggling with lower commodity prices. Other companies at a disadvantage include QBE Insurance Group Ltd (ASX: QBE) and Cochlear Limited (ASX: COH), which generate a significant amount of revenue from international markets.
Foolish takeaway
The banking sector could be hit hard when interest rates rise as bad debts will inevitably rise with them. Higher interest rates could also see volatility heighten in the market as other asset classes become more attractive to investors.
