How the Aussie dollar moves your investments:
It has been a wild ride for the Australian dollar since the Covid-19 pandemic struck and that can mean good news or bad news for investment portfolios.
In March 2020, the Aussie dollar dipped below US58 cents for the first time in a decade. Since then, a high of just over US77 cents in 2021 has been followed by a rollercoaster ride, mostly downhill.
In October 2022, the dollar plummeted to US61.9 cents. It bounced its way back up to US71.3 cents in February this year, but by mid-August, had slipped to a nine-month low at under US64 cents. i
Many analysts agree that further falls are on the cards, with some even predicting the dollar could fall to as low as US40 cents within five years. ii
What’s driving the dollar?
Given any currency’s susceptibility to changing economic conditions both at home and overseas, the Aussie dollar has had quite a bit to deal with lately.
Rising interest rates can boost the Australian dollar by making us more attractive for foreign investors, providing our rates are rising ahead of the US and others.
If foreign investors buy more Australian assets because they can get a bigger return on their investment, more money flows into Australia, which increases demand for Australian dollars. And if investors hold more Australian assets than overseas ones, less money leaves the country, decreasing supply. So, increased demand and decreased supply see the Australian dollar rise.
While the Reserve Bank of Australia (RBA) has increased rates by 4% in Australia since May last year as it battles to get inflation under control, rates have also been rising in the US.
The US Federal Reserve has undertaken its most aggressive rate-rising cycle in 40 years with rates now at a 22-year high, and signs of further increases likely. This has put pressure on the Australian dollar, narrowing the difference between the US and Australian rates, meaning foreign investors will look for better returns elsewhere.
Changing economic conditions:
The value of the Australian dollar is also affected by changes in economic conditions, as well as rises and falls in other financial markets. For example, in August, news that the unemployment rate had increased slightly, combined with an easing in wage price growth, led to speculation that the RBA would put a hold on rates. This put a dampener on the Aussie dollar.
Also affecting the dollar was a decline in US share markets in August, confirming the typical pattern of the Australian dollar falling when prices in equity markets drop.
Meanwhile, the performance of China’s economy plays a significant part in Australian dollar movements. China is currently battling soaring unemployment, particularly among young people, falling land prices and a housing crisis, amid other ills.
As Australia’s largest trading partner, both in terms of imports and exports, any slowdown in China means lower sales of our commodities and other goods and services, as well as less investment in property and business. iii
How the dollar affects us:
There are advantages and disadvantages of a falling Australian dollar. On the plus side, our exports will be more competitive because our customers will pay less for our goods and services, compared with those produced overseas. Conversely, imported goods will be relatively more expensive.
There could also be an increase in tourism – the cost of travel in Australia will be cheaper for those coming from overseas. Unfortunately, those planning an overseas trip will need to find a significantly greater pile of Australian dollars to pay for airfares, accommodation and shopping.
So as Financial Advisers, how do we monitor the currency’s effect on your portfolio?
If you’re invested in Australian companies that rely on overseas earnings, we look at how they handle their exposure to the currency risk. A lower dollar is good news for those with overseas operations and those that export goods. On the other hand, those that need to buy in components or products from overseas may suffer.
In these uncertain times, Clear Sky Financial advisers are always available to demystify complexities and deliver simple advice that makes a positive impact on your financial well-being. Please reach out to our team of experts if you would like to find out more.
Information contained in this document is considered to be true and correct at time of publication. In addition, the information provided is general information only, and does not take into account any individuals’ objectives, financial situation and needs. Before acting on any information contained herein, you should consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.