Contributed

Plenty of surprise at our commodity and currency recovery

SINCE early January many financial markets types (including your scribe) have been caught by surprise by the recovery in Australia's key commodity export prices and the Australian dollar.

Since mid-January, the dollar is up by 12% against its US counterpart, and 9% against the trade-weighted basket compiled by the Reserve Bank.

Over the same period, the US dollar price of iron ore that had been in freefall for much of 2015, has risen by about 63% and the prices of coking and thermal coal have come up by 17% and 10% respectively.

Although the stronger Australian dollar has taken some of the edge off the gains, prices are still higher in Australian dollar terms for iron ore and coking coal, although not for thermal coal.

While good news for Australia's export revenues, it's also good news for the Federal Budget - higher export receipts translate into higher corporate tax revenues. We'll find out just how good that news is in a week or so, and I'll write about the budget at some length next time. However, given this is written by an economist, it can't be all good news, can it? No.

For Queensland in particular, there's a significant risk that the stronger Australian dollar, if sustained, will take the edge off what has been a solid improvement in overseas tourism.

Over recent years we've seen not just a surge in Chinese tourist arrivals, but also a decent pick-up in US tourists. In the past year or two, any time I've been to Cairns it's been easy to notice the Americans, after not seeing many for some years.

While the impact on tourism might be a negative, surely the rise in the price of coking coal (which accounts for the bulk of Queensland coal exports) is good news for Queensland? At the margin, yes, but the impact of higher commodity prices is all the more powerful if it translates into a recovery in employment in mining and related industries.

I'm not convinced the gains we've seen so far are strong enough to see that happen.



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