The US dollar is already worth less than a euro. Now will it fall behind the 'Aussie'?

The Australian dollar is flirting with parity with its US counterpart for the first time, buoyed by Australia's mineral wealth and its connections to the Asian boom

• 
• • Andrew Clark
  • The Observer, Sunday 17 October 2010
  • Article history

 

A US one-dollar bill below an Australian 10-dollar and 20-dollar bill. Photograph: Jason Reed/Reuters 

 

Bad news for Antipodean-bound cricket fans heading to the Ashes next month. There's a big, bad currency beast on the loose: the Australian dollar. Buoyed by high interest rates and rampant commodity prices, the "Aussie" has rocketed to an all-time high and is on the brink of parity with the US greenback.

The Australian dollar, once disparaged as the "Pacific peso", touched 99.82 •••CHECK US cents this week – its highest level since it was unleashed to float freely in 1983. In the foreign exchange markets, the pound buys just A$1.60, compared to more than A$2 in the summer of last year.

The Aussie's renaissance over the last three months has eclipsed the performance of other fancied currencies including the Japanese yen, the Swiss franc and the Canadian dollar. Its surge was hailed by Australia's finance minister, Penny Wong, as a vote of confidence in the Australian economy – although a steady stream of Australian exporters have warned that their overseas profits are dwindling.

Daniel McCormack, a London-based economist for the Australian bank Macquarie, said the country's rich reserves of coal and iron ore, together with economic growth in its Chinese and east Asian trading partners, had turned the land of plenty into a financial safe haven.

"The Australian economy is strong and it's been fairly well managed," says McCormack. "But the main reasons the Australian dollar is doing so well are commodity prices, plus the strength of China and the rest of Asia."

Australia was one of the few developed countries to avoid a recession during the global financial crisis. Firm fundamentals have allowed the Reserve Bank of Australia to set interest rates at 4.5% – far higher than Britain's 0.5% or America's 0.25% – in a further lure for global flows of capital.

Four years ago, some 30,000 British sports fans travelled to Australia to watch England endure a five-nil drubbing in the Ashes. As England's cricketers prepare for a fresh tour, the cost of travel is soaring. David Swann, a currency strategist at Travelex, says that, at a typical bureau de change, a holidaymaker exchanging £500 would have got A$1,250 at the start of the last Ashes season down under, compared with just A$805 today.

"That's a really significant shift," says Swann, who points to talk of further quantitative easing both in Britain and the US as a reason for capital to slip to other corners of the world. "The US has come out and said it's going to extend its quantitative easing programme. That sends a message to people in the US that the US economy is in trouble and that they should go elsewhere."

The Aussie is not the only currency flirting with parity against the greenback. Canada's dollar – known as the "loonie" after the bird depicted on the C$1 coin – is worth US$1.0036••CHECK and has been within cents of its US counterpart all year. These second-tier currencies are often overlooked in the battle surrounding the yen, the euro and the yuan.

For exporters, such sharp shifts are a significant headache. CSL, an Australian biotechnology company specialising in vaccines and treatments for blood disorders, warned at its annual meeting this week that the strength of the national currency could slice as much as A$100m out of its profits this year. The Australian airline Qantas has reported higher outbound traffic, but empty seats on flights coming into Australia.

According to the Australian tourist office, some 649,400 people travelled from the UK to Australia in the year to July – a drop of 1%, blamed largely on disruption caused by Iceland's volcanic ash cloud rather than by currency exchange. But fears are growing of a fall-off in foreign visitors – the Australian Broadcasting Corporation reported that crowds were "thin" at Sydney's Darling Harbour on a weekday lunchtime this week.

One Perth-based adventure tour operator, Easyrider, ceased operations this month, blaming the soaring currency for a critical shortage of British and Irish backpackers. Owner Chris Cronin told the ABC that the number of people booking tours had fallen from 16 per bus to six or eight: "There are a lot more people out there that are really going to suffer because of the strength of the Australian dollar at the moment," he said.

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Middle class want more cheer

Malaysia's Tax Budget 2011

ON THE BEAT WITH WONG CHUN WAI

Middle income group hopes spillover effects, especially from tourism and construction sectors, could help.

LET’S face it – many of us expected more from Budget 2011 than what has been delivered. Probably because of wishful thinking, the result of inaccurate media speculation and the belief that it would be a pre-election budget, we expected, or more precisely we hoped for, better tax reliefs in individual income taxes.

But that didn’t happen, so many of us in the middle income group are frowning.

Most of us who work and live in the city eat out a lot. Living in the Klang Valley, we work late, so eating in restaurants is a necessity rather than an option.

The increase in service tax won’t be welcomed. Having to pay more to the govern­ment for my Astro isn’t amusing either, especially when the free-to-air TV stations have not lived up to our expectations.

Sure, we grumble a lot over Astro’s repeats and most of us have had enough of monster fishes and reptiles. But we still need the satellite station for our weekend football matches.

Luckily, the urban middle class who also enjoy going to drinking spots in Bangsar have been spared another round of hikes on excise duty for beers and stouts. It is already the second most expensive in the world after Norway.

The setting up of the National Wage Consultation Council with representation from all stakeholders is important. We can’t talk about wanting to be a high income nation when there is no minimum wage in Malaysia. Certainly the council will be entrusted with making recommendations on minimum wage as well as other measures.

Many in lower and middle management are caught in situations where they are not entitled to overtime claims because they are not in the unionised category but they have heavier responsibilities and work longer hours than their subordinates.

In many cases, this group of middle class executives and managers end up earning less than those working below them.

However, many Malaysians would be happy to hear that they will get a 50% stamp duty exemption on instruments of transfers for buying houses worth less than RM350,000 if they are first-time buyers.

Still, many city folks will be hard-pressed to look for homes within this range. In Kuala Lumpur and Petaling Jaya, many link houses are priced at over RM1mil; semi-detached homes are more than RM2mil; and apartments are priced from RM400,000 to over RM2mil.

There’s some small comfort, though. The abolition of import duties on 300 items is welcomed. It’s not just for handbags and lingerie, as the list includes cotton T-shirts and even Christmas decorations.

So, let’s give credit when credit is due. After hotel bills, shopping is the second highest spending item for tourists so it is a big deal for the tourism sector, which is the country’s second revenue earner after manufacturing. In 2007, Malaysians and tourists spent RM67bil on shopping.

It has been reported that Malaysians have RM200bil as savings in the bank. Spending, or consumption as the economists prefer to call it, is essential to make the economy move.

In the United States, Australia and parts of Europe, there are factory outlets where one can buy branded items. There is none in Malaysia. It is our biggest disadvantage because tourists like to buy branded items at good discounted prices in a central area.

In the absence of such a facility, the removal of duties on these 300 items, especially branded goods, would help boost the tourism sector. There will be spillover effects because promoters who work in shopping outlets would benefit from bigger sales. So, it is inaccurate to suggest that the men in the street would not benefit. From hoteliers to taxi drivers and restaurant owners, tourism is helping them in a big way.

The Petronas Twin Towers, which have become a tourist attraction, will be dwarfed by the proposed 100-storey building under the Wawasan Merdeka mega project.

Like the KLCC, which was developed on an expensive piece of land once used for horse racing, the proposed tower will also be built on prime land that is currently idle.

The 88-storey Twin Towers project was heavily criticised when it was first mooted by Tun Dr Mahathir Mohamad.

Judging from the comments in blogs and Twitter, the proposed tower must be the most unpopular item from the Budget.

Many Malaysians have expressed doubt over the viability of the project and fear that the tall building would have occupancy problems as there is already a glut of office space in KL. Others are asking how this mega project would benefit Malaysians.

These are genuine concerns and obviously Permodalan National Bhd will need to explain its plans for the building. At 100 storeys, it will be one level short of the 101 Taiwan. The tallest building in the world, Burj Khalifa in Dubai, has 108 storeys.

So, if the Wawasan Merdeka building isn’t going to be a world beater, what are we going to achieve with this mega project?

Being prime land, we surely do not expect PNB to put up a 10-storey building there, so it will be good for them to share the benefits of the project to enable Malaysians to appreciate it better.

Hopefully, its construction would have multiplier effects, bringing in economic benefits for other sectors

We hope the project is part of an integrated push for KL to take the next leap forward. No one would argue with the need for the Mass Rail Transit (MRT), which will make travelling in the city much easier. No decent capital city in the world can do without it.

The push to make KL a financial centre under the RM26bil KL International Financial District plan would help strengthen our position as a reputable international Islamic banking. Talk is that Jalan Imbi has been identified for the project. The property market in KL will surely be the beneficiary if this takes off.

From a middle class perspective, the hope is that there will be spillover effects from this slew of projects which will be taken up by the private sector with input from the government. When buildings are put up, the construction sector will be the main beneficiary.

See the related earlier post::
 A painless, facilitative budget

Policies made to measure

For the ultra-rich, there’s the luxury of tailor-made insurance plans

By LORNA TAN

SINGAPORE: Very wealthy people, not surprisingly perhaps, are in the market for insurance policies that pay out mega sums.

But until fairly recently, the market in Singapore was so limited that these people often had to go abroad to arrange such policies.

Times are changing as this high-end market grows larger. Insurers here, eager to tap into the burgeoning very wealthy population, have launched ‘jumbo’ or ‘universal’ policies to cater to their needs. These plans provide very large death benefits, above S$653,000 (RM1.5mil) and as much as S$25mil (RM60mil) or even more per policy.

Some plans, such as the AIA Platinum Legacy policies, actually have no upper limit on the sum assured and these jumbo cases will be assessed on a case-by-case basis.

Needless to say, you need to have deep pockets to buy a universal plan. But high net worth individuals (HNWIs), to use the industry jargon for these very well-heeled types, also enjoy the flexibility of deciding the amount and frequency of additional premiums after paying the minimum initial premium, subject to certain conditions.

For example, Prudential’s PruUniversal Vantage’s premium is paid on a lump sum basis.

Prior to 2005, such high-end products were available only through offshore providers, and clients were flown to Hong Kong for underwriting. In 2005, United States insurer Transamerica Occidental Life Insurance Company set up an office here.

As the market for such plans took shape, more insurers have jumped on the bandwagon. Said Walter De Oude, chief executive of HSBC Insurance (Singapore): “Given the rising affluence in Asia, there is certainly a demand for solutions to help HNWIs protect and distribute their wealth.

“Our high net worth business for HSBC Jade Select Universal has more than doubled in the past year,” he said.

HSBC Jade Select Universal was launched early last year and is the only one in the region that has a multi-currency option and multiple tenures for interest rate guarantees, he added.

Currently, there are seven insurers offering universal life products. Of the seven, three –Canadian insurer Manulife, local insurer Great Eastern and British insurer Prudential Assurance – launched their universal plans this year.

Universal life plans are a variant of traditional whole life and endowment plans, where policies accumulate a cash value. But there are several factors that distinguish them from plain vanilla policies.

For instance, the premiums and death benefits of universal plans are flexible. The period of coverage can also be altered to meet desired financial goals from the policy’s cash value accumulation.

This differs from a traditional life plan that serves to provide specifically a death benefit (whole life plan) or a maturity benefit (endowment plan) and does not offer such flexibility, said Tang Yin Fong, wealth management firm Providend’s risk management senior specialist.

Universal life plans also differ from traditional products, whose cash value is dependent on the investment performance of the insurer’s life fund. Instead, the cash values of universal life products are dependent on so-called ‘interest-crediting rates’ declared by the firm. Most of these plans come with a minimum guaranteed interest rate.

For instance, for AIA Platinum Legacy plans, the crediting rates for the plans vary but there is a minimum guaranteed rate of three per cent, said Paul Hughes, chief marketing officer at AIA Singapore.

The downside to such policies is that the death benefit or sum assured may not be guaranteed. This means that the policy could lapse if the crediting interest rate falls to its bare minimum. The premium may be insufficient to cover the monthly deduction for charges, such as mortality costs, if the policyholder fails to top it up.

To prevent this from happening, some insurers offer a no-lapse guarantee benefit, which guarantees cover even if the cash value of the universal life plan drops to zero, subject to certain conditions.

Patrick Lim, associate director at financial advice firm PromiseLand Independent, also cautioned policyholders to note that the policy may lapse if the minimum premium requirement is not met, subject to certain conditions.

The commissions for such policies are quite substantial, usually 10% of the single premium.

Plans for estate planning

Financial experts say that universal life plans are most appropriate for estate planning. This includes accommodating the wishes of the well-heeled to preserve their wealth so as to leave behind a meaningful legacy for future generations or charities.

Said Albert Lam, investment director at IPP Financial Advisers: “One key advantage is that a universal life policy is not an off-the-shelf product. It can be tailor-made to suit the needs of customers.”

He gave the example of a grandparent, aged 60, who purchased a universal life policy for S$400,000 (RM900,000) on the life of his son, aged 30. The sum assured was S$2mil (RM4.7mil) and it was meant to provide protection to his grandchild upon the death of his parent.

If the parent did not pass away, the policy provides the flexibility of paying out a pre-agreed percentage of the premium on an annual basis when the grandchild reaches 18 or 21 years of age for the next decade or so. This can be used to fund the grandchild’s university education or supplement his salary in the initial years of employment.

Other uses of universal life plans include retirement planning, where one’s wealth may be enhanced through the plan’s benefits. Such plans are also used as collateral for banking facilities, and to fund business succession planning where key personnel are insured.

Given the huge premiums required to kick-start a universal life plan and to keep it in force, the target market for such products is primarily the mass affluent and HNWIs.

“These people would be looking for a life policy that is more flexible and has the potential to accumulate larger cash benefits,” said Lim. It appears that such products are more suitable for older investors, who are around 50 or older.