Managing currency volatility

Funds Management

by Clive Tompkins

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MLC Portfolio Manager, Dr Ben McCaw discusses the AUD-USD moves immediately following news reporting of the decision by China to slow the importation of Australian coal into China's Northern port of Dalian.

Sinead Rafferty: I’m Sinead Rafferty, Portfolio Specialist at NAB Asset Management. And today I’m joined by Dr Ben McCaw, Portfolio Manager for the MLC Multi-Asset portfolios. Welcome Ben.

Dr Ben McCaw: Thanks Sinead.

Sinead Rafferty: In recent days we’ve seen the Australian dollar fall against the US dollar on the back of concerns in the market over Australian imports into China. Can you tell us what’s occurred and what your view is?

Dr Ben McCaw: That’s correct Sinead. Last Thursday there was unconfirmed reports of delays processing Australian coal imports, through the northern Chinese port of Dalian. Now the news wires were flooded with reports that mentioned two very important statistics. The first one being that coal is now Australia’s largest export, and China is Australia’s largest export destination. So when you put those two things together and have a situation where our nation’s largest export is hitting some hurdles being imported into the nation’s largest export partner, then at that level seems like it’s a problem for the currency. It could be a problem for the currency, because of the impact on flows.

But in this situation it’s not so straightforward, because while China is an important market for Australia for coal, it’s not the most important market. Australia’s most important market for coal in fact is Japan, I think China comes in at number two. But the thing that interests me is that when you look at the Chinese market as a whole for Australian imports, it’s dominated by iron ore. In fact, the last year anyway, the dollar value of iron ore imported into China was about five or six times the amount of coal imports into China.

So while this is an issue for the currency, it’s a very small issue and the market took about a cent off the currency, in response to that news. That’s recovered somewhat since. But what it had done was take some momentum off the currency that we’d gotten on the Australian dollar, from a strong jobs report earlier in the week.

Sinead Rafferty: Did this create some opportunities in terms of how you manage the MLC portfolios?

Dr Ben McCaw: As you’re aware, currency is extremely important for inflation per se, more as a risk diversifier than anything else. And so while we have quite a bit of foreign exchange exposure, especially to the US dollar, we’re always watching the behaviour and trying to work out the best strategy, for the portfolios. So when the currency comes down, that’s good for us. The problem is that when the currency is lower, then there’s a higher chance that is going to go higher.

So in a situation like this, where it looks like perhaps the market has overdone the reaction, or overreacted to the news. What we’re actually looking to do is to add hedges back to protect us should the currency rebound. But net-net, this is a very good move; this was good for the MLC portfolios.

Sinead Rafferty: One last question for you Ben. Is there any connection to this event to the ongoing global trade wars?

Dr Ben McCaw: That’s a very difficult question to answer and it’s hard to speculate on those types of issues. Some commentary from the Australian Government and some of the miners in Australia has highlighted the fact, that this is somewhat normal. I wouldn’t say it’s normal. And in this quite tense geopolitical environment that we’re in now, there’s obviously a possibility that it’s got some geopolitical underpinning. It may not. But when you look at it from China’s point of view, then there are some contradictions in this story.

The first one being that green or environmental policy is very important in China at the moment. And while coal is often associated with being more of a dirty energy generation source, Australian coal is in fact, a lot cleaner than some of the alternatives that China would need to turn to, if they were going to make it hard or to ban Australian imports into the country. I don’t think it is, but I wouldn’t rule anything out.

Sinead Rafferty: Thanks for your time Ben. And thank you for joining us.