A$ slide a pain point for Singapore firms with Australian exposure

Singapore

THE Australian dollar's (AUD) recent dive against the Singapore dollar (SGD) to hover at 0.98 will hurt Singapore firms with exposure to the currency. While analysts do not see a silver lining on the immediate horizon, they expect a rebound back above parity when the ongoing US-China trade war cools.

The currency was trading at a peak of S$1.063 in late January this year but has since lost about 7 per cent. It slipped further below parity recently and has been trading sideways at 0.98. The last time it went under S$1 was back in 2015/2016.

Analysts believe that in the short term, the battered Australian dollar could spiral down further - mainly because of the risk-off view towards Australia caused by US-China tariff tensions.

Marcus Wong, strategist at CIMB Bank's treasury department in Singapore, said: "AUD remains sensitive towards China due to its export dependence on China as well as being a risk-off instrument."

The Australian dollar has been seen by some analysts as the whipping boy in the trade skirmishes between the world's two largest economies. Investors have the tendency to gravitate towards lower-risk investments in a risk-off environment.

Terence Wu, currency economist at OCBC Bank, is also bearish about the outlook of the Aussie dollar into year-end.

He explained: "From a structural perspective, there may be more downside for the AUD relative to SGD as the Reserve Bank of Australia (RBA) remains a laggard in terms of policy normalisation.

Fundamentally, economic prints for Singapore are firmer in comparison." Kay Van-Petersen, global macro strategist at Saxo Capital Markets, holds a similar view. "This time around, China is under a lot of pressure from the US, whilst this affects both the SGD and AUD negatively - it is probably (having) a larger effect on the latter, given a roaring and robust China has a lot more demand for Australian goods, predominantly metals.

"I think also that the Monetary Authority of Singapore is more hawkish than dovish in comparison to the RBA."

Heng Koon How, UOB head of markets strategy, provided the technical perspective. He said: "Over the near term, we see risk of key downside technical target for AUD/SGD at 0.9709." The potential downside technical target for AUD/USD is 0.7000, he forecast.

Having said that, Mr Heng expects some possible bottom fishing by Singapore investors who have a need to accumulate the Australian dollar.

He said: "At current level below parity for AUD/SGD, there may be renewed demand for buying the AUD."

Australia has always been a favourite destination for Singapore holidaymakers, students and property investors.

In addition, demand may also return in the longer term as the US-China trade spat eases and the Aussie dollar finds its equilibrium.

While he is bearish in the short term, Mr Heng said: "Once the risk-off environment passes, the AUD/SGD may be positioned for a rebound back above parity."

He thinks this risk-off period may last for a few weeks at least, until the US and China return to the negotiation table to resolve the trade conflict.

CIMB's Mr Wong shares this view: "Towards end-2018, the AUD/SGD could potentially reverse over parity, though (it) is not expected to rise much higher than that. This is on the assumption that the escalation in US-China trade war would slow or halt after the US November mid-term elections."

Rob Carnell, Asia-Pacific ING head of research and chief economist, also thinks the headwinds for the Australian dollar will pass.

He said: "Currencies are never weaker forever, though you might make some exceptions for the currencies of truly ruined economies. So in due course, the AUD will find its feet."

Any recovery in the Australian dollar against the Sing dollar would be music to the ears of local companies with significant exposure Down Under.

They include Singapore-listed Singtel, whose Australian unit Optus accounted for 24 per cent of group underlying net profit in FY18.

Already, a weaker Australian dollar and regional currencies have exacted a toll on the bellwether stock's 1QFY19 underlying net profit, which fell 3 per cent due to adverse currency movements.

The telco does not hedge translation risks of earnings and net investments in foreign currencies unless approved by its finance and investment committee, according to its report "Management Discussion and Analysis of Financial Condition, Results of Operations and Cash Flows" for 1QFY19.

But it has a policy to substantially hedge all known foreign currency exposures related to commercial commitments or transactions as well as liabilities denominated in foreign currencies. CGS-CIMB has an existing forecast for Singtel's FY19/20 group core net profit based on a forex assumption of S$1.01/A$. Its analyst Foong Choong Chen thinks that in the event of a 10 per cent depreciation in the Aussie dollar, the impact on the telco's forecast FY19/FY20 group core net profit would be -2.2 per cent and -2.1 per cent respectively.

He told The Business Times: "So the fair value impact is approximately -2 per cent."

Besides Singtel, other Singapore- listed firms with considerable presence in Australia will also be watching the currency closely.

Colin Tan, analyst at CGS-CIMB, thinks transport giant ComfortDel- Gro's earnings contribution from its Australian bus operations would be hit in Singapore dollar terms. He pointed out that Australian operations accounted for about 12 to 13 per cent of ComfortDelGro's 1HFY18 revenue.

In fact, the firm's exposure to Australia is also set to increase as the bulk of its acquisitions so far this year were made Down Under.

Mr Tan's colleague Lock Mun Yee, who covers the real estate sector, said Frasers Property Ltd (FPL) through Frasers Property Australia is likely to see its earnings impacted by currency translation.

Its Australian unit made up 25 per cent of FPL's total profit before interest and tax for the first nine months of FY18.

But one of its Reits, Frasers Logistics & Industrial Trust, which owns assets in Australia and Europe, does have a policy to hedge earnings against foreign exchange risk.