FYI | Apr 12 2007
By Chris Shaw
Share prices generally have been boosted by recent merger and acquisition activity, in part because money is being returned to shareholders and then reinvested in the market. What many investors have overlooked is the impact this is having on the Australian dollar given many of the takeover deals are coming from overseas players who need to buy the local currency to pay for their purchases.
As ANZ Bank’s senior currency strategist Tony Moriss and economist Cherelle Murphy point out, the impact of the takeover deals currently underway offers potential for the Australian dollar to receive significant support in the short-term.
The Cemex bid for Rinker (RIN) is an obvious example, as it will become the largest corporate takeover in Australian history if completed at more than $17 billion. The Qantas (QAN) deal is another example, as the bank estimates around A$1 billion in offshore equity and up to A$5-6 billion in offshore funding subsequently swapped back into Australian dollars will be required to finalise the deal.
Coles Group (CGJ) is another potential example, as if the KKR consortium eventually wins control it will need to buy a large amount of Australian dollars, while the proposed Alinta (AAN) deal would represent another $4 billion or so.
The impact of this money flowing into the domestic currency in the short-term according to Moriss and Murphy is it will balance what has been even larger outflows from purchases of offshore equity by local entities.
These include local superannuation and life insurance funds and cash management trusts investing in overseas assets, with figures for 2006 showing outflows represented around 8% of GDP compared to 5% for inflows.
The bank suggests while the current merger and acquisition spree on the Australian market should help bring this ratio into balance in the short-term, longer-term the key remains interest rate differentials.
As Moriss and Murphy note, the Australian dollar is one of the beneficiaries of the carry trade in Japanese yen given the significantly higher interest rates on offer in our market. However, they caution if there is anything to reverse this trend, such as higher rates in Japan leading to the carry trade being unwound, the inflows currently being enjoyed could quickly reverse, so investors would be wise to keep an eye on interest rate differentials.