The Australian dollar is expected to keep rising this year amid hopes of global growth, economists have predicted, and Aussies should be poised to take advantage of the lower prices.
The AUD started at US$0.69 at the beginning of January 2020 and ended the year at US$0.77, a growth of about 12 per cent.
Strong commodity prices, high volumes of export sales and overall positive global growth were factors that kept the dollar high last year, and it’s expected to hold through 2021.
“The Australian dollar is a cyclical currency because of Australia’s high exposure to commodity exports, so whenever global growth is expected to slow it falls, but when global growth is expected to rise the AUD goes up,” AMP Capital chief economist Shane Oliver told Yahoo Finance.
When the pandemic hit the world in March last year, the AUD collapsed – alongside global growth – to a low of US$0.55, but has since rebounded to its current level of US$0.77.
The Australian dollar moves higher as the US dollar moves lower, which tends to rise in times of uncertainty and drops during economic recovery, he added.
The Australia Institute senior economist Matt Grudnoff also said Australia’s control of the virus had assisted the economy.
“Keeping the economy strong during the pandemic seems to have more to do with controlling community transmission than the lockdowns—while lockdowns do suppress economic activity, if governments are successful in controlling the spread of the virus they increase consumer confidence and spending, creating the conditions for a strong economy,” he said.
Modest growth expected for AUD in 2021
As Australia’s economy continues to rebound and business returns to normal, Oliver expects the Aussie dollar to remain high.
“The rally to US$0.78 saw the dollar get a bit ahead of itself and it’s now seeing a correction, but the trend in the AUD is likely to remain up as commodity prices continue to rise and the US dollar sees more downside,” he said.
“By year end we see it rising to around US$0.80.”
Commonwealth Bank currency strategist Joseph Capurso has a less optimistic view of the Aussie dollar’s growth, forecasting that it will end the year unchanged at $0.78.
While commodity prices are a significant driver of the Aussie dollar, trade tensions between Australia and China could threaten its growth, he warned.
“China is diverting its sources of agricultural products to the US because of its phase one trade agreement and away from Australia,” he said. The good news is that Australia has alternate agricultural export markets other than China.
And the prices in these alternate markets might be even cheaper compared to China, he added.
“So far this year there is no obvious downtrend in Australian agricultural prices. But it is a risk worth monitoring.”
What to do with your money
Typically, a strong Aussie dollar would mean better bang for your buck when travelling and spending overseas or buying products in other currencies.
But with international travel simply not an option, Aussies can take advantage of the higher dollar when shopping online, particularly goods sold in US dollars.
“The strong dollar will lower the cost of imported items - this is how consumers can benefit as cars, electronic equipment and other imports drop in price,” said independent economist Stephen Koukoulas.
Oil prices are also determined in US dollars, making petrol potentially cheaper, added Grudnoff.
Savvy shoppers should ensure delivery charges on the US site are ultimately lower than an Australian counterpart, Oliver pointed out, otherwise they may end up with a shopping cart that is more expensive than it needs to be.
However, one caveat of buying overseas goods is that the money doesn’t stay in Australia, the economists pointed out.
“Of course, the higher the dollar, the more there is a constraint on the local economy to grow. If we consumers skew our purchases to cheaper imported goods as the expense of locally produced goods, the local economy will be weaker than it would otherwise be,” said Koukoulas.
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