Dollar drops as floods darken outlook
Chris Zappone
January 12, 2011 - 10:52AM
Click to play video
Economic impact of floods
The Queensland floods will have a large economic impact on housing nationwide. APM Senior Economist Andrew Wilson discusses.
Video feedbackVideo settings
The Australian dollar has fallen to a one-month low against the US dollar as Australia's economic outlook darkens with the news of the Queensland floods.
The Aussie was trading just above 98 US cents this morning, the lowest level since December 9, as global traders fretted about the impact of closed mines and damaged infrastructure holding back Australia's exports and growth.
“From a global perspective, the perception in the market place is the holes in the armoury of the Australian economy are starting to show and as the impact of floods in Queensland continue to escalate, there's little doubt this perception of weakness in the economy will manifest in currency price action,” said Go Markets trader Christopher Gore.
Advertisement: Story continues below
The floods, which began last month in Queensland, have claimed the lives of at least 10 people. Ninety are still missing this morning. The inundation has forced the closure of dozens of mines and production facilities in Queensland.
Australia supplies about a third of the world's coal and is crucial to China's industrial production.
Economists are already predicting the floods will cut between 0.2 of a percentage point to 0.5 off the nation's annual GDP growth.
And Reserve Bank board member Warwick McKibbin believes it could be as high as 1 per cent - or the equivalent of $13 billion.
Westpac economics has estimated Australia's economy will lose 0.3 per cent in annual GDP.
“The timing of the hit and recovery means we could see first-quarter GDP ... drop by as much as 1 per cent before the recovery boost growth in the following quarters,” said Westpac.
The Australian economy grew by 0.2 per cent in the third quarter, or 2.7 per cent year on year.
Fears of a weaker economy have lowered expectations for Australia's interest rates, as well, with Credit Suisse debt markets pricing in only one rise in the cash rate by 2012.
Currency analysts believe that unless tomorrow's unemployment figures come in stronger than the 5.1 per cent expected – notching down from its current level 5.2 per cent - the Reserve Bank may hold rates flat at least until June.
“The RBA may not tighten rates in the first half of the year at all, as the exogenous shock of the floods dampens GDP growth considerably more than consensus expectations,” said Boris Schlossberg director of currency research at New York-based GFT.
Currency values are closely linked to the interest rates associated with them.
Australia's 4.75 per cent official interest rate is among the highest in the world, in effect turbo-charging investor interest.
Global investors have also piled into the Aussie dollar in recent months as a way to benefit from Asia's growth. Australian exports of coking coal represent about 64 per cent of total global exports of the key commodity used in steel production, with Queensland holding the majority of those deposits, according to Westpac.
With three in four Queensland mines shut and not expected to return to normal output for at least a week, the disruptions to coal exports are substantial. Disruptions to transport networks also mean rail movements of coal and other commodities to ports have been hampered.
The state also produces about a quarter of the nation's fruit and vegetables.
"The grain harvest had mostly been completed and livestock moved to higher ground," said Roland Randall of TD Securities.
"Only those crops not ready for harvest or that cannot reach markets - such as sugar cane and some fruit and vegetables - have been lost."
However, melons, pineapples, grapes, citrus fruit and some vegetables could be hit, analysts said.
“There's not expected to be any impact on fruit prices on the short term arising from the flood,” a spokesman for Woolworths said, largely because those vegetables had already been cultivated and more crops were currently being harvested from the unaffected southern states.
However, yesterday Wesfarmers-owned Coles supermarket warned that supply shortages would drive up the prices on tomatoes, capsicum, lettuce and other salad vegetables.
[email protected]
