The Australian Dollar - Why has it fallen? - Nick White & Sally Fisher

For the last few years both the Australian economy and the Australian dollar have ridden the global surge in demand for commodities. Break-neck growth in the emerging economies of India and China have fuelled the massive demand for Australian raw materials and, as a result, the Australian dollar is now one of the world's most traded currencies.

Since 2001 when the $A traded at $US0.48c, it has enjoyed a spectacular rise to a high of $US0.9849c on July 16 this year. In fact at the time, there was much anticipation of a move to parity, and further speculation that the $A would achieve pre-float levels of $US1.25 to $US1.30. Just as the economy has benefited from the commodity boom so to have consumers enjoyed cheaper imports due to a strong A$.

But all that has changed, and changed at a rapid pace. In little over 2½ months the $A has crashed an unprecedented 35% to $US69c having briefly touched a five year low of US0.6312c mid-October.

So why has the A$ fallen so dramatically and so quickly? Just as the commodity bull market gave strength to the A$, so the current commodities price weakness has contributed to its rapid decline. In large part, this weakness has been as a result of hedge funds aggressively selling risk assets, such as commodities. With some hedge funds having borrowed US$20 for every US$1 invested, the credit crisis has necessitated a rapid repayment of those loans.

Historically, a currency is a reflection of the underlying strength of the economy it represents, and in this regard the fundamentals of the Australian economy are good. Although the fundamentals remain positive, the $A has significantly underperformed the major currencies, particularly the US dollar, which is enjoying a remarkable come back despite a looming recession and being the major victim of the worst financial crisis since the Great Depression.

Until confidence and stability returns to global financial and credit markets, fundamental investors are expected to remain broadly risk averse. In addition, the recovery from the current crisis will probably be prolonged and painful. Consequently, in the short term, the US dollar is expected to remain reasonably well supported.

The Reserve Bank has clearly signalled the intention to further ease policy settings if required and as a result, another 1% cut in the Official Cash rate is forecast to 5% by the middle of next year. This expectation will potentially further constrain the upside for the $A to around 0.7500.

The Australian dollar may remain range bound between 0.6500 and 0.8000. Participants in the FX markets should be prepared for a 12- month period (or longer), of relative underperformance before the underlying fundamentals support the re-emergence of the long-term uptrend versus the US dollar.

While the A$ fall has unnerved many, it is good for domestic economic growth and companies with significant earnings in USD. So the game continues ....

Nick White - General Manager - Bell FX    Sally Fisher - Manager - Bell FX

To learn more about the range of foreign exchange services offered by Bell FX please visit www.bellfx.com.au  

Bell FX is part of Bell Potter Securities Limited. The information presented in this article is general advice only and is not intended for any particular individual. No consideration has been given to the individual investment objectives, financial situation and particular needs of any person and Investors should independently assess whether the advice is appropriate to their own circumstances. Although this information is taken from sources considered to be reliable Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information is complete or accurate. Further we do not accept any responsibility to inform you of any matter that subsequently comes to our notice that may affect the information disseminated in this article.

The Usual Rules Do Not Apply - Thomas Averill

The stimulus behind this fall has been panic stricken financial markets; you may well ask why does this lead to a run on the Aussie Dollar? Surely where the pain is being felt the most (the USA) should suffer more, so why has the USD strengthened so much at the expense of the AUD?

There have been a number of factors:

1. The biggest driver in October has been risk aversion this will in the majority of cases lead to USD strength, as speculators exit positions to their default currency, namely the USD. To put the recent thirst for USDs in perspective on the 15th September 3m USD Libor was 2.82%, on the 10th October it peaked at 4.82%! Extreme volatility is almost uniformly caused by risk aversion. Because of its relatively high yield and position in the now effectively redundant carry trade the AUD is considered a risky asset and thus suffers more than most other major currencies. Hence you have also seen the AUD significantly under perform against currencies such as Sterling and the Euro.
   
2. The RBA has already taken the extreme measure of cutting interest rates by 1% to 6% at their last meeting with expectations that could continue to fall to as low as 4.5% in the months ahead. The recent RBA minutes state that global inflation has "peaked" and demand from emerging economies is likely to fall and will thus be unable to turnaround falling commodity prices, which in turn will worsen Australia's terms of trade.
   
3. Since 2001 the AUD had been benefitting from the commodity bull market, the recent unilateral turn around in commodity prices has thus applied significant pressure to the value of the AUD.

October has seen significant government/central bank intervention in order to avert a financial market melt down, from co-ordinated interest rate cuts and liquidity injections to bank nationalisations and government backed inter-bank lending. This has resulted in significant improvements in money market liquidity and the market's attention is now focused on concerns over the real economy - are we facing a global recession?

Thomas Averill - Senior Consultant - FX Advisory Services - HiFX

For information about HiFX and their Foreign Exchange services please visit www.hifx.com.au  

This information is general information only. Readers should consider their own financial situation, particular needs and investment objectives before acting.

Understanding Support and Resistance Levels - Julia Lee

Understanding support and resistance levels can greatly assist both traders and investors. It's all about understanding how prices tend to move. There are usually psychological barriers to prices moving beyond key levels. Support and resistance is all about understanding where those levels are and how prices are likely to move from that level.

Think of a support level like a physical floor on the share price. Say that a share is trading at $4.30 and imagine there is a floor at $4.00. As the price moves towards $4.00, it has a difficult time getting past that price because the floor stops the price from going below $4.00. In fact you will probably see the price bounce off $4.00 as it tries to drill a hole in the floor. The more times that the price touches the floor, the weaker the floor will become. This occurs until the floor is broken. Once the floor is broken, the share price is free to fall to the next floor or support level.

Once a support level has been broken it becomes a resistance level.

A resistance level is like a ceiling. Say that a share is trading at $4.30 and it is moving upwards but there is a ceiling at $4.50. It tries to break it but can't so it keeps on bouncing off this point. The more times that the share price touches this point, the weaker the ceiling becomes until the share price breaks past it and that resistance level is now a floor to future price movements.

As you can see, support and resistance levels are simply areas that prices seem to have difficulty moving past. They are significant because once broken, it leaves the share price relatively free to move until it hits the next support or resistance level.

So how do you identify support and resistance levels?

Support and resistance are important concepts in charting or technical analysis. In technical analysis, the past casts a shadow over the future by repeating itself in patterns. Hence support and resistance levels are usually historical levels where the share price had difficulty moving through in the past. Often these can be previous high points or low points.

There are many other tools you can use. The Fibonacci series is a series of numbers which has an uncanny ability to describe patterns in nature and natural relationships. These proportions can also be applied to the way that share prices move. Important percentages include: 23.6%, 38.2%, 50%, 61.8% and 78.6%. The level of 50% isn't really a Fibonacci ratio but nevertheless is considered an important level. When using the ratios, usually the distance from the beginning of a trend to the end is measured and then the ratio is applied to the gain or loss to work out where the next level of support or resistance will be. For example, if the share price has risen in a trend starting from $3.00 and ending at $5.00 before falling, then the first Fibonacci support level should be at 23.6% of $5.00 - $3.00 which is $2.00 so at $4.52, the next 38.2% support level would be at $4.24 and then the 50% retracement would be at $4.00 and then so on and so forth.

Essentially support and resistance levels are psychological barriers for the share price which act a floor to the share price when the share price is rising (support) and like a ceiling when the share price is rising (resistance).

Happy Investing!

Julia Lee - Equities Analyst - Bell Direct

To buy or sell shares from as little as $15 per trade, go to www.belldirect.com.au  

Bell Direct does not provide investment advice. This information is general information only. You should consider your own financial situation, particular needs and investment objectives before acting.

Property investors will need to have a well thought-out plan before they make the transition to retirement. -  Julia Hartman

This story was inspired by an API reader who had found her dream retirement home a little too soon and a few questions I was asked at the API stand at the Sydney Property Expo.

It gave me a new profile of property investor: the baby boomer. Someone with a few rental properties with high capital gains and their own home which is post-CGT (bought on or after September 20, 1985) but too big for their retirement.

Usually property investors approach retirement with no debt on their own home but quite a bit on their rental properties.

Here are three possible strategies they'll be considering:

1. Selling off some rental properties to reduce the debt

If you're considering this you'll have to pay capital gains tax (CGT), though with careful planning you would hope to keep the effective tax rate down to 7.5 per cent by putting the proceeds, after the 50 per cent CGT discount, into superannuation.

Nevertheless, 7.5 per cent of a $400,000 gain is still $30,000.

And if the gain is more than this and it's only owned by you and your spouse you won't be able to put any more of it into superannuation, as the limit for tax-deductible contributions for over 50s is $100,000 per annum.

2. Borrowing against your properties to live on

Not for the faint-hearted; you need to be confident that you'll always have enough growing equity to borrow against (leaving the CGT bill to your children) and remember that the interest on these borrowings won't be tax deductible (nor will they increase your cost base) so your portfolio may still manage to become taxable later in life when you need to find a lot of after-tax dollars to finance the loan repayments on the non-deductible borrowings you've lived off for the past 20 to 30 years.

At that stage you may well be forced to sell one anyway. The trouble with selling later rather than sooner is that you may be too old to qualify for a tax deduction for superannuation contributions.

This would happen if you're over 65 and can't pass the work test, or if you're over 75 regardless.

3. Cashing in superannuation to pay off the loans

This would only be suitable in very limited circumstances.

You need to consider that money in superannuation can be rolled into a pension fund where there will be no tax on its earnings or capital gains.

Further, the pension it pays you will also be tax free once you're over 60.

The baby boomers are at a time in their lives when they should be working out how to get money into super, not take it out.

Now before you go thinking 'let's shift these properties over into our own self-managed superannuation fund (SMSF), don't bother.

Superannuation funds can't buy domestic properties from their members.

Taking money from a zero tax environment to increase investment income outside of superannuation could lead to you, later in life, earning so much income out of the properties that you're taxable and too old to put it back into the superannuation fund.

After all, you intend to be retired for a very long time.

In that time rents will go up and your depreciation claims will go down. Building depreciation for properties built between July 17, 1985 and September 16, 1987 will be all used up within 25 years. That will start to happen in 2010.

If your rental property was built after that date you have 40 years from when the construction finished over which to depreciate the building costs.

So most of the properties you now have in your portfolio won't qualify for building depreciation when you're too old to reduce your tax by contributing to superannuation.

This is something to be very concerned about considering you could, instead, have been living very happily tax free for the rest of your life just for having more of your wealth in a pension fund.

If you're thinking that later in life you'll sell off some properties to live off the proceeds or simplify your life, don't leave it so late that you can't reduce the effect of the capital gain by contributing to superannuation.

The right retirement planning now means paying no tax at all by the time you reach 60 until you die.

With the use of a transition to retirement pension you can also arrange your affairs so that you pay no more than 15 per cent tax from the time you reach 55, even though you're still working.

If you're looking to pay no tax at all once you reach 60 then you need to plan to only have $21,680 in taxable income each as a member of a couple, outside of superannuation.

This is the figure for 2008, it's indexed each year. Just as your rents will increase, so will that threshold.

But what happens when you run out of depreciation to claim?

The next trap could be that you may not be able to spend all your income.

You'll be forced every year to draw a minimum amount out of your pension fund. This is a percentage of the total amount in there.

The percentage increases as you get older. If you don't spend all this it could earn you income and push you over the tax free threshold mentioned earlier.

A terrible problem to have but a good reason to start out with earnings considerably under the threshold while you still have the opportunity to move funds into superannuation.

Ultimately, you'll need to find some clever ways to cash in your properties without losing too much to CGT.

Some tricks

You need to look at each of your properties and see if any of them would fit into the following tricks.

Taxable gain of less than $200,000 after the discount and owned in joint names

This is a great one to sell just after you retire if you're over 50, though if you're over 65 you'll need to carefully combine the work test and have so little in wages that you qualify to claim a tax deduction when you contribute the capital gain into superannuation.

The beach shack with a huge capital gain

Hopefully you've had the foresight to hold in your rental property portfolio a little beach shack that will suit you very well for your retirement.

Being by the beach will probably also mean it has heaps of CGT attached to it. Never mind. If it's still considered your home when you die your heirs inherit the property at the market value at your date of death.

Yes, all the lurking CGT liability disappears. This means you've effectively covered both your old home and this beach house as your main residences during the time you owned your old home.

Don't worry if you're living somewhere else in your later years.

You can rent the place out for six years and still have it considered your main residence when you die but if you go over the six years it may be more profitable to not rent it out. You see, the six-year rule extends to an indefinite period if the property isn't income producing.

Now, what about getting the beach house into a state suitable for your retirement?

Make sure you do all the repairs to get it into just as good condition as it was in when you purchased it while it's still a rental, or at least in the same financial year that it was a rental so the cost will be fully deductible.

The house you used to live in before you moved into your current one

As discussed on page 64 of the March API, the last place you want your main residence to be is the property you live in because any expenses that aren't claimed as a tax deduction can increase the cost base if it was purchased after August 20, 1991.

This can include interest, rates, insurance, repairs and even light globes and cleaning materials.

If it's a rental then those expenses would have been claimed as a tax deduction.

So if you have a previous home that's now a rental see how little CGT you'd have to pay if you sold it but left your main residence exemption there for six years after you moved out.

The family home

If you're a classic baby boomer, you probably have a house that's far too big for your needs now.

If you can't use the trick above, this can usually be sold free of CGT and without reducing deductible debt (i.e. deductions against income outside of superannuation).

If you can utilise the trick above, still do the sums on this option after claiming all the holding costs while you lived there as the CGT may be minimal.

It's not just the costs while it wasn't covered by your main residence exemption that increase your cost base, it's the costs for the whole time you lived there.

Pre-CGT property

Note if your home is pre-CGT, make sure you leave your main residence elsewhere if you've ever lived in any of your other properties.

A pre-CGT property is the best one to sell later in life (maybe the nursing home nest egg) as your death will mean it loses its pre-1985 status anyway so you've made the most you can of it and as the proceeds will be tax free, you don't have to worry that you're too old to put them into super.

Consider changing the property to commercial

This is something to do while you're still able to contribute to superannuation. You see, a property that's used solely in a business can be transferred into your superannuation fund.

Superannuation law doesn't specify that it be a commercial building, though you'd probably be in a bit of bother if the business isn't legally allowed to operate there. A change of use to home occupation won't cut it because you'd have to live there as well, which would mean it wasn't solely used for business. The business doesn't have to be your own business and it can be any type. For example, professional rooms which domestic properties easily adapt to.

Just remember that transferring the property into your SMSF will still create a CGT liability for you and if you put some of the proceeds of the sale into the super fund to help it pay for the purchase, the fund will pay 15 per cent tax on them if you claim the contribution as a tax deduction.

NOW Some tricks FOR YOUR HEIRS

Hopefully that's enough to get all your retirement savings exactly where you need them at minimal tax.

Don't feel mean leaving the CGT to your children.

They're only going to pay it if they sell the property and then there are some strategies they can also implement.

For example, to get the small business CGT concessions which can reduce the CGT to zero an asset has to be used in a business for 7.5 years or half the time it's owned.

Leave the high CGT property to a child in business.

They can use it in their business and as long as they qualify as a small business and have used the property in the business for half the time they (not you) own it, they could eliminate the CGT completely.

You have to get financial planning advice to get these ideas to work at their best for your circumstances.

This is just intended to get you thinking ... and maybe dreaming.

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting. Please read our warning and disclaimer.

Too much super can mean extra tax - Laura Menschik

The Australian Tax Office (ATO) advises that all super members, including Self Managed Super Funds (SMSF), who may exceed their contributions caps, and hence incur a tax, need to understand the rules. Your SMSF has a chance to change assessments if appropriate.

Non-concessional contributions

Generally, non-concessional contributions are the contributions made by or for you to a complying super fund that are not included in your fund's assessable income. Assessable income is income that is subject to tax.

Non-concessional contributions are sometimes known as "after-tax" contributions. These contributions include:

• personal contributions that you don't claim an income tax deduction for (this includes personal contributions made to defined benefit funds and untaxed (constitutionally protected) funds).
  
• contributions your spouse makes to your super fund unless your spouse makes contributions because they're your employer.
  
• contributions in excess of your concessional contributions cap (that is, your excess concessional contributions).
  
• contributions in excess of your lifetime super capital gains tax (CGT) cap amount.
  
• amounts transferred from foreign super funds, excluding amounts included in the fund's assessable income.
  
• any contributions made from 10 May 2006 that have not previously been counted as non-concessional contributions if the fund changes from being a non-complying fund to a complying fund, and
  
• amounts transferred from foreign super funds, excluding amounts included in the fund's assessable income.
  
• contributions made for you if you are less than 18 years other than contributions made by your employer.

Non-concessional contributions do not include:

• the super co-contribution.
  
• contributions arising from certain structured settlements or orders for personal injuries that result in permanent incapacity.
  
• contributions up to a lifetime limit of $1 million (indexed) arising from the disposal of qualifying small business assets under the CGT small business exemptions.
  
• contributions made to a constitutionally protected fund that would have been assessable income of the fund if the fund was a taxable super fund (for example, employer contributions made to an accumulation fund that is constitutionally protected).
  
• contributions to a public sector super scheme that are not included in the fund's assessable income because of a choice made by the scheme's trustee (sometimes called last minute contributions).
  
• a rollover or transfer of a super benefit between complying funds, and
  
• the tax-free component of a directed termination payment.

Changing an assessment

Generally, before the ATO issues you with an excess contributions tax assessment, they will write to you so you have a chance to give them any relevant additional information.

1. If you disagree with the information from your income tax assessment

Any deduction you have been allowed for your personal contributions in your tax return is also used in calculating any excess contributions tax liability. Amounts that you are allowed as a deduction in your tax return are concessional contributions rather than non-concessional contributions.

If you have not correctly claimed the amount of your personal deductible contributions you may be able to amend your tax return. The ATO may confirm this information with your fund before amending your assessment.

For more information about personal deductible contributions please refer to "Claiming deductions for personal super contributions" (NAT 71975) on the ATO website.

To request an amendment to your income tax assessment please refer to "Amendment requests" (NAT 3823) on the ATO website.

If you amend your income tax return, we will generally use this amended information to make the excess contributions tax assessment, or to amend your existing excess contributions tax assessment.

2. If you disagree with the excess contributions tax assessment

If you receive an excess contributions tax assessment and you disagree with it, you can:

• request an amendment within four years from the date of the notice, or
  
• lodge an objection to the assessment within four years of receiving the assessment.

If you believe that you exceeded a cap due to special circumstances, you can apply to the ATO to disregard or re-allocate some or all of a contribution.

Your SMSF advisers will be able to assist you in these matters and should be consulted to ensure that your contributions and tax assessment are correct.

Laura Menschik
Director and Authorised Representative
WLM Financial Services Pty Ltd.
CERTIFIED FINANCIAL PLANNER TM - SMSF SPECIALIST ADVISER TM
WLM Financial Services Pty Ltd offers Chartered Accounting, Financial Planning, Superannuation, Investment and Insurance services.   Visit WLM Financial Services online wlm.com.au

A discussion about Australia's Key Export Commodities as the Global Economic Crisis deepens - Peter McGuire

The sustained commodities boom that has informed the rise of the Australian economy over the last few decades appears to be softening as even the staunchest bulls reassess their market outlook. The word recession is also now ingrained in the vernacular of investors worldwide, and whilst the Australian banking and financial system is amongst the most robust in the world, there is no true local insulation when it comes to today’s globalised economy. For commodity markets, the current bleak scenario is set to abate as soon as markets realign and long term fundamental market drivers regain centre stage in the mind of investors.

With the recent global commodities sell-off leading to downward pressure on prices, and an unprecedented level of volatility impacting financial markets, many Australian investors are looking at market conditions for the nation's key export commodities as a yardstick to measure the subsequent impact on the local economy.

For Australia, economic growth is forecast to fall by 0.95%, from 3.7 to 2.75 over the coming financial year and coupled with the 29% fall of the Australian dollar against the greenback over the last three months, investors are looking for defensive assets to ride out market volatility.

This said, it's not all doom and gloom. If you look at the demand growth picture for many commodities it is still increasing, just at a decreasing rate. For Australia, our future is underpinned by the outlook for many key commodities and hinges on bilateral trade with China, where much of the demand for our resources originates.

The Chinese are Australia's leading trade partner, with bilateral trade worth approximately AUD$52 billion according to The Age, and if there are demand issues relating to key commodities such as Iron Ore, the broader Australian economy could suffer, impacting investor sentiment in the melee.

Although Prime Minister Kevin Rudd has recently been assured by his Chinese counterparts that demand for Australian commodities will remain strong, many headline indicators, such as slowing Chinese GDP growth, point to a possible short-to-mid term deceleration.

In the International Monetary Fund's (IMF) recent World Economic Outlook, the global body forecast strong Chinese and broader Asian demand for Australia's energy and mineral exports, and said that this could provide Australia with a marginal economic buffer against the Global Economic downturn. That said, the report also predicted Australian growth would decline from 4.2 percent in 2007 to 2.2 percent in 2008 to 2.2 percent in the coming year.

On 3 October in Canberra, the 12th round of negotiations regarding the Australian/Chinese free trade agreement concluded, bringing us one step closer to tariff liberalisation. The move to free up trade between the two nations will add support to Australia's broader export markets and developing trade beyond the resources boom.

For the demand picture it is more difficult to accurately gauge the Asia-Pacific landscape. The strength of Chinese demand for raw commodities to support their rapidly urbanising economy has led to strong demand to date, however some recent occurrences have shaken the confidence of market participants.

Last week, Iron Ore exporter, Mt Gibson Iron Limited announced that one of their Chinese customers entered discussions with the company to delay shipments because of stockpiling, falling steel sales and lack of access to funding. After record price settlements for the annual Iron Ore contract earlier this year, the Mt Gibson announcement permeated the minds of investors as a sign of clear affront to the previously unshakable resources boom. In fact both BHP and Rio Tinto (who together with Brazilian company Vale who lead the contract negotiation) have reduced their forecast of the 2009 Iron Ore contract due to potential oversupply, which was echoed by UBS which has downgraded its 2009 forecast by 15 percent.

Whilst the short-to-mid term outlook for some base metals remains uncertain, agricultural commodities have emerged as an interesting, yet volatile investment play. Despite a fall in prices for many agricultural commodity markets over the last few months, the general landscape remains positive.

The falling Australian dollar has lead to a surge in export revenue for farmers across the nation, and according to the world's largest agribusiness lender, Rabobank, local lending activity remains strong. This perception is reinforced by data released by the Australian Bureau for Agricultural and Resource Economics (ABARE) who is predicting export earnings will jump 30% in 2008/09 financial year.

ABARE has also forecast a 9 percent rise in farm export earnings driven by exports for wheat, canola and sugar amongst others. If you look broadly at this picture, and with the backdrop of recent declines in the grain markets, the relatively positive outlook has been buttressed by the falling Australian dollar.

For wheat, one of Australia's larger export commodities, recent price falls have been offset by the reduction in export costs resulting from the falling Australian dollar. Given the current status quo, many pundits have commented that Australia is relatively well placed to weather the financial maelstrom currently engulfing global financial markets.

Whether this is entirely true remains to be seen, however, good long term fundamentals for Australian export commodities are strong. The basic fact that China continues to urbanise, governments are cultivating biofuel programs to wean the populous off oil, and surging global population growth means demand pressure on food related commodities, means that the current situation is set to ease and prices should regain some stability.

While global commodity markets have come off significantly over the last few months as an outflow of speculative capital has removed the previous price supports, the fundamental market drivers remain strong. For Australia's key export commodities, a buffer has been created by the falling Australian Dollar. With fear gripping many, a trend often becomes an overarching reality as skittish investors follow each other to the corners of exchange traded markets around the world. In a situation such as this, investors should keep a cool head when looking to trade these highly volatile markets.

Peter McGuire - Managing Director - Commodity Warrants Australia    www.cwa.net.au
Peter is a regular commodities commentator on Bloomberg Television and CNBC and appears widely in the Australian financial press.

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