By Robert Fenner and Candice Zachariahs Oct. 29 (Bloomberg) — A Swiss couple trudged into the deserted lobby of the 12:01 East Backpackers hostel in Perth after an eight-hour drive in Western Australia. Manager Winnie Kuwaja, sitting in a nearby office stuffed with tourism brochures, said he was pleased to see them. The global financial crisis suppressed tourism numbers worldwide, yet Kuwaja said his 60-bed inn, where rooms start at A$25 ($22.50) a night, suffered a double whammy. The Australian dollar is up 41 percent against the U.S. dollar since March 2, and Kuwaja said business is down about 25 percent in that time. “The rising currency has made it more difficult,” Kuwaja, 46, said. “When they party now, they drink less. The rubbish bins I need to take out are getting lighter.” The Australian dollar is the best-performing currency among the 16 most traded over the past 12 months, reaching a 14-month high of 93.29 U.S. cents on Oct. 21 and trading at 89.86 cents as of 5:07 p.m. in Sydney. About 35 percent of earnings at publicly traded Australian companies are affected by gains against the dollar, said Chris Pidcock , a strategist at Goldman Sachs JBWere Pty., local affiliate of the world’s most profitable securities firm. This is the Aussie dollar’s third stretch over 90 U.S. cents in as many years after averaging 70 cents in the past decade. It reached 94.01 in November 2007 and peaked at 98.50 on July 15, 2008, the strongest since it began trading freely in 1983. Winemakers The rising currency makes it cheaper for Australians to travel overseas, yet hurts local operators by making their goods and services more expensive. Peter Bentley, export manager for Pikes Wines , sends about 10 percent of the 40,000 cases produced annually by Pikes Wines to the U.S., where they’re sold under the Pikes and Red Mullett labels. “Our cost of production hasn’t changed so if we have to cut prices then our margin is cut and we have to put people off,” he said from the vineyard in the Clare Valley of South Australia, about 1,350 kilometers (839 miles) west of Sydney. “The next few years are going to be really tough.” Banks expect further gains, buoyed by the prospect of rising interest rates and an economy where gross domestic product contracted in just one quarter since 2001. Calyon, the investment-banking unit of Credit Agricole SA; Barclays Capital, a unit of Barclays Plc; and National Australia Bank Ltd. predict parity with the U.S. dollar next year. Foster’s, Billabong Melbourne-based Foster’s Group Ltd. , the world’s second- largest winemaker with brands including Rosemount and Beringer, expects each 1 cent increase against the U.S. dollar to cut pretax earnings by A$3.6 million. Billabong International Ltd., Australia’s biggest surfwear maker, said every 1 cent gain shaves A$500,000 from earnings. Stephen Strachan , chief executive officer of the Australian Winemakers Federation, said some producers are abandoning the U.S. market while others are pulling vines out of the ground because they can’t compete on price. “It’s just stripping margin out of our business at an intolerable level,” he said of the rising currency. Casella Wines , maker of the top-selling Australian wine in the U.S., is considering building a U.S. bottling plant and shipping its Yellow Tail across the Pacific in bulk as the Aussie approaches 95 cents. “That is about 30 percent higher than the average and there isn’t a 30 percent net margin in what you sell,” Managing Director John Casella said. Interest Rates Philip Lowe , assistant governor of the Reserve Bank of Australia, warned Oct. 19 that the nation “will have a higher average exchange rate” than in past decades given its high return on capital. Interest rates in Australia are 3.25 percent compared with near zero in the U.S. and Japan. “This time around it feels like the rising trend may well persist,” said Greg Gibbs , a currency strategist at Royal Bank of Scotland in Sydney. “You’ve got an incredible degree of monetary and fiscal stimulus, bank guarantees and the rest. The chances of a major capitulation in confidence like we saw last year seem remote.” RBS forecasts the currency will reach 97 U.S. cents in the first quarter of next year. Two-time Olympic gold medalist Michael Klim may have to raise prices for his Milk Skincare products, which he started exporting two years ago. “Milk cannot push into new price points,” said Klim, part of Australia’s swimming relay teams at the 2000 Olympics in Sydney. “We already have problems with our low margins and we have no room for adjustments.” Australia this month became the first member of the Group of 20 to increase borrowing costs since the height of the global recession last year. Reserve Bank of Australia Governor Glenn Stevens said he can’t be “too timid” in raising rates amid government stimulus spending and demand for minerals from China, the nation’s second-largest export market. Monkey Mia Swiss accountant Rene Tanner slumps in a red armchair at 12:01 East Backpackers after a 500-mile drive from Monkey Mia, where he and his wife, Sara, watched dolphins. The Tanners, of Frauenfeld, are traveling around the world for several months and like to keep A$400 in their wallets. At the beginning of their four-week trip to Australia, they paid 360 Swiss Francs in exchange. Now they pay 380. “If we’d come to Australia earlier we would have had to have gone home by now,” Rene Tanner, 29, said. “It’s much more expensive than it was five years ago.” International visitors to Australia in the eight months to Aug. 31 totaled 3.5 million, down 3 percent from the same period last year, according to government figures . 12:01 East Backpackers was filled to about 90 percent of capacity during its first five years, Kuwaja said. Since March, it’s down to 65 percent. “People are going on fewer tours,” Kuwaja said. “They only go out on Fridays and Saturdays now.” To contact the reporters on this story: Robert Fenner in Canberra rfenner@bloomberg.net ; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net .
