BY SEAN HEALY
Peter Costello's 1995 comment about a weak Australian dollar needs one small but important revision: devaluation impoverishes every working-class person in Australia. For owners of capital, especially those who own assets in foreign currency, the devaluation is very good news. Under capitalism, after all, money always wins.
The big Australian financial and non-financial corporations will most likely be untouched by the dollar's free fall, because they usually engage in complex financial arrangements known as "hedging", which eradicate or reduce "currency risk", the chance that just such a devaluation may reduce the total dollar price of their assets.
Further, the Australian dollar (AUD) price of foreign currency assets has actually increased by the exact amount the AUD has decreased. A US$100 million investment, whether a mine or a stock portfolio, was worth A$156.6 million in January 2000; the same investment is now worth A$203.1 million thanks to the devaluation.
Both financial and non-financial corporates have followed a deliberate strategy of diversifying their holdings beyond Australia, precisely to avoid taking losses as Australia's importance to the world economy declines. Companies' offshore holdings have risen from less than 15% of total capital in 1996 to close to 20% at the end of 2000, according to Commonwealth Research.
This is precisely the strategy behind the $58 billion merger between BHP and Anglo-South African mining firm Billiton. The day after the dollar's largest plunge, a spokesperson for BHP revealed that company estimates were that, even before the deal, it made $46 million in revenue for each one cent fall in the AUD against that of the US dollar.
No spokesperson for any of the major commercial banks has revealed similar estimates of their gains, but Reserve Bank of Australia figures reveal that the banks held $50.7 billion in foreign assets in December.
There's also mounting evidence that banks and other major corporate holders of Australian dollars made money speculating on a fall in the AUD.
Most observers put the fall in the dollar's value down to a noted absence of buyers — no-one, not even Australian exporters who generally provide a floor for the dollar by buying quantities when it's cheap, wanted to purchase it. So bad has it been that the Reserve Bank has been forced to enter the AUD market every month for the past six months, spending reserves in order to provide a buyer to those desperate to sell.
But who exactly has been selling? The AUD has taken hits during trading on the New York, Tokyo and London currency exchanges, that's true — so the dreaded Wall Street trader has something to do with it.
But 50% of all AUD transactions occur in Australian markets, and it was sold down just as heavily during Australian trading sessions, which indicates that domestic holders of Australian have been selling them just as fiercely as foreign holders have been.
Trading against the AUD is also standard strategy for most big investors. While corporates may hedge against currency risk, they primarily do so against the risk of a rise in the Australian dollar, which reduces the value of foreign currency holdings. Hedging against a fall is considered financially stupid, as it cuts off a company from a potentially valuable asset gain.
This prevalence of corporates trading on expectations of a fall was underlined by the March 16 advice given to clients by Craig James, the chief economist of Comsec, the Commonwealth Bank's securities trading arm: "There is no resistance to further declines in the Australian dollar, making for profitable trade by trend followers."
Similar advice was given by other currency strategists. It's a bit much to expect they didn't follow their own advice.
One survey of 13 big fund managers, printed in the March 17 Australian Financial Review, showed that most either didn't hedge at all or "actively hedged" — that is, they kept their eyes constantly open for gains made by trading against the Australian dollar.