Aussie dollar comeback could turn off foreign buyers

Despite Chinese investment in Australia plummeting almost 60 per cent in a year, the planet being engulfed in an era-defining lockdown due to a global health crisis that is still peaking, and unemployment soaring around the world, a pugnacious Aussie dollar has somehow climbed off the canvas.

The Australian dollar is seen as a risk barometer, taking blows when times are uncertain and winning bouts against all currencies when the sun is shining on global markets.

The COVID-19 pandemic had appeared, quite logically, to deliver a knock-out blow to the Australian dollar.

Renowned as a tenacious featherweight fighter that punches like a middleweight - a population of 25 million with the world’s fifth most heavily traded currency - the Aussie was down for the count at 55 cents in March.

Like Aussie boxing legend Jeff Fenech, who never knew how to stay down, the AUD has grabbed the ropes and pulled itself back up to 70 US cents, a 25 per cent increase in just three months.

So what’s behind this against-the-odds comeback?

A perception that the worst of the pandemic is over has helped. Global cases continue to soar but mainly in regions that are not influencing the major markets. Locals now spending their travel money at home is also a supporting factor, with peripatetic Aussies ordinarily spending double what incoming visitors spend annually.

State and federal government stimulus packages, including building and renovation subsidies are also making an immediate impact on housing demand, the economy and, by extension, the Aussie dollar.

Aussie’s headwinds

A currency specialist from a Hong Kong-based international brokerage, who cannot be named for regulatory reasons, said the AUD’s rise was a surprise and other factors may weigh more heavily on the currency in the short to medium term.

“It appears for the moment we may have seen a ceiling in the Aussie at its current highs,” the specialist told Australian Property investor Magazine.

Tensions between Canberra and Beijing were just one flashpoint that could suppress the Aussie dollar.

“Even the sabre rattling has had minimal impact so far and the stunning rally in global equities has also caught many by surprise, as the US Federal Reserve adopts a ‘whatever it takes’ stance to support credit and funding markets. 

“The Fed’s super easy monetary policies have seen the USD sell off aggressively, which has led to Aussie strength.

“However, there are risks, namely relations with China that could cap the Aussie’s rise as well as second wave of virus cases that could hurt growth again, although this is not being priced in at the moment,” the currency expert said.

Iron ore prices have risen above US$100 per tonne after Brazilian production was limited by coronavirus. Australia is the largest iron ore exporting country in the world, followed by Brazil and China is the largest importer of iron ore, with a 65 per cent share of all of the world’s imports. 

“Iron ore prices have been on a tear, which has been a big support for the Aussie,” the Hong Kong source said.

“But if the US economy continues to recover faster than expected, USD weakness could reverse as the Fed takes back some of its emergency measures, thus weakening the Aussie.

“If trade tensions between the US and China increase or the US and other countries look at some form of retribution, Australia, which has already been caught up in this, caught be hit hard.”

Property currents

Signs of China’s retreat from Australia are becoming increasingly obvious.

There was a 58.4 per cent drop in Chinese investment in local businesses last year, bringing the total spend down to $3.4 billion, and around half of that was in a single deal for a Tasmanian milk formula producer. This is the lowest level of investment since 2007, a new report released by KPMG and the University of Sydney revealed this week.

Beijing has shifted capital towards developing nations that have signed up to President Xi Jinping’s expansionist Belt and Road Initiative.

Australian food and agricultural businesses were the biggest recipients of Chinese investment, with 44 per cent of the total funding flowing into the sector. The commercial real estate sector was the second largest recipient despite an annual decline of 51 per cent.

It all adds weight to suggestions the Aussie dollar would need to punch into even stronger headwinds if it was to advance much beyond the 70 US cent benchmark.

The low Aussie dollar was one reason international buyers, including Chinese, were snapping up local properties, and its relative strength could deter foreign and expat buyers.

The Hong Kong finance and foreign exchange expert told Australian Property Investor Magazine there had been a lot of interest in Australian property when the Aussie was at its COVID-19 lows, from Hong Kong and mainland Chinese investors. 

Hong Kong remained the most popular destination for capital from mainland China for real estate, with Chinese investment in property also increasing significantly in Japan, Singapore and Malaysia.

“Hong Kong’s new security law could see larger demand for Australian property if the situation in the harbour city worsens and any meaningful dips towards the US60c level could see another wave of demand for Aussie housing from overseas buyers,” the source said.