POSTED BY ANGUS GEDDES
The RBA predictably left rates on hold at 1.5%, and the accompanying statement was more of the same. The central bank cited pockets of strength, weakness and risks to the economy, and significantly failed to give any pointer once again on when the ultra-low interest rate period would end.
While there are cases for and against tightening, I think the tie-breaker is the A$, and as I have written many times, the RBA (along with others globally) will not want to entertain too much currency strength for any length of time and ‘complicate’ the economy’s ‘adjustment’.
As we penned in our predictions at the start of the year, the 80 cent mark is probably a level the RBA does not want to see, and certainly not for an extended period of time. The A$ has been inching closer towards that level and I think this will be playing on the mind of officials. Maintaining a neutral stance has sent a message to the markets, and we saw the A$ sell off to 76 cents as a result.
Upward pressure on the currency is building however, and in terms of the big picture, it is inevitable for the A$ to at some point break above major resistance at 78 cents. Albeit the catalyst needed to propel the currency through this this barrier will be a sustained advance in commodity prices.
Yesterday’s RBA release only reinforces our view that currency strength will be contained near term, which bodes well for our export exposures – not just the diversified miners, but also agricultural stocks such as Elders and also those with foreign currency earnings, such as Nufarm. Our analyst team also like Amcor in this regard.
Having the currency remain range bound below 78 cents will also continue to be a positive for the tourism sector in Australia, and the likes of accommodation operator Mantra Group. Mantra, one of the largest hotel operators in Australia, has come under pressure over perceived threats from Airbnb. This has taken its toll on the stock price, which at one stage was down nearly 50% from the record highs of a few years ago.
However, I think these threats are very much overstated and overcompensated for in the current share price. And with inbound tourism numbers set to maintain a significant upward trajectory over the next five years, Mantra is positioned for significant upside in my opinion. We hold Mantra has a significant position in the Australian Managed Accounts and the Fat Prophets Global Contrarian Fund.
