- Strategy is based on the RBA cutting by 25 basis points to 2.00% at the May meeting and the A$/US$ cross rate breaking below 75 US cents.
- The Aussie dollar fall is driving international inbound tourism.
- The 12-month Sydney Airport price target is upgraded from $5.55 to $6.00
Reserve Bank Governor Stevens pulled the rug from underneath the Australian dollar on Monday night with more direct currency jawboning, this time in front of a receptive audience in New York.
The A$/US$ cross was trading up (78.5 US cents) after the better than expected March employment data in Australia, perhaps even heading towards 80 US cents on short-covering, when Stevens again took direct aim at the currency, which saw it track back down to 76.88 US cents.
The global game
Make no mistake, the RBA has entered the global currency devaluation war and still has 2.25% of ammunition to deploy.
They will need to deploy some of that cash rate policy ammunition as simply replying on a rallying US dollar and jawboning will not break the Aussie dollar lower from here. US data has hit a soft patch, mainly due to US dollar strength effectively acting as a policy tightening, and expectations of the Fed raising cash rates in June have evaporated.
The Fed’s rate hike timing continues to get pushed back and the rest of the developed world is either in QE or near ZIRP mode. To my way of thinking, this increases the likelihood of the RBA having to cut cash rates to 2.00% at the May meeting.
My short-term macro strategy is based on the RBA cutting by 25 basis points to 2.00% at the May meeting (ahead of the Federal Budget) and subsequently the A$/US$ cross rate breaking into a new lower trading range below 75 US cents. My long-term macro strategy is based around the RBA cutting rates to 1.50% and the A$/US$ cross rate heading to 68 US cents.
Being an Aussie dollar bear from 106 US cents has served me well in terms of global asset allocation and being exposed to ASX-listed offshore earners (industrials). I remain a firm dollar bear, particularly versus the US dollar, and continue to set short, medium and long-term strategies off lower A$/US$ cross rates.
The Sydney Airport story
The good news is the Aussie dollar fall, particularly against US dollar and US dollar pegged Asian currencies, is driving international inbound tourism numbers up. A recovery in inbound tourism is extremely important to Australia to partially offset the downturn in our key export commodities. The multiplier effect of tourists spending cash is large through the economy.
Australia as a tourist destination has become a far more attractive proposition. This is particularly so versus the Chinese yuan, New Zealand dollar, Hong Kong dollar, US dollar and British pound.
NZ dollar/Aussie dollar
[1]Hong Kong dollar/Aussie dollar
[2]British pound/ Aussie dollar
[3]Chinese yuan/Aussie dollar
[4]That better relative and absolute value is driving international passenger traffic through our key gateway airport, Sydney Airport (SYD).
In the table below you can see that International Traffic through Sydney Airport performed very strongly during March, increasing +8.9% vs. the previous corresponding period.
[5]While earlier Easter school holidays, the end of Lunar New Year celebrations and the ICC Cricket World Cup all played a role in the strong March number versus the previous corresponding period, what is interesting is the year to date international number is 3.9% higher than the previous corresponding period.
To quote directly from the Sydney Airport March traffic report: “International passengers grew 8.9% on the previous corresponding period primarily as a result of a 7.5 percentage point increase in load factors. The Australian outbound market performed well, increasing 7.7% and foreign nationalities grew 9.8%. Filipino (42.1%), Indian (39.9%), Chinese (38.8%), Hong Kong (27.0%), Korean (11.7%) and UK (9.9%) nationality passengers were the major drivers of international growth in March.”
“Chinese nationals increased 38.8% in the month, benefiting from Lunar New Year celebration return trips. The Indian nationality also continued its recent strength, up 40% on the previous corresponding period and up over 25% year-to-date.
The home game
“Domestic traffic grew 4.2% over the month driven by both seat capacity increases and load factor improvements. All domestic airlines experienced load factor improvements relative to the previous corresponding period”.
Warren Buffett famously said “a monopoly toll bridge is my dream investment”. Sydney Airport is a “monopoly toll bridge” that now has strong macro tailwinds for activity and valuation.
Crown and Sydney Airport are now key members of my Nifty 15. They are my two domestic listed plays on the rise of the Asian international tourist.
After the robust March traffic numbers and taking into account year-to-date growth, future airline capacity growth and movements in long bond yields and currencies, I am upgrading my 12-month Sydney Airport price target from $5.55 to $6.00
Go Australia, Charlie
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.