Recently I stood in line at a currency exchange shop front. I was looking to exchange my Aussie dollars for US but given the recent fall in the Aussie, the rate was not in my favour. I ultimately received fewer US dollars than I gave over in Aussie dollars.
I made the exchange at the Sydney Airport International Terminal. If I had made that same transaction a month earlier, I would have saved a substantial amount of money.
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For those who care about the dollar, and where it’s heading, including travellers, exporters, and companies with overseas interests, here’s a brief overview of two key things influencing our currency.
1. Commodities prices
The price of iron ore is perhaps the single biggest influencer of the Australian dollar. In recent years the price has risen steadily.
As tragic as they have been, several Brazilian mine disasters have given the iron ore market quite the boost. The ‘shortage’ of the commodity led to an increase in its price.
Insatiable demand from China, and an increase in the price of iron ore, has led to the Coalition government to be able to credibly forecast a budget surplus in the 2019/2020 financial year, and has seen the Australian dollar hold its value despite strong forces pulling it down.
The forces pulling the dollar down though are not going away anytime soon… so they’re worth looking at.
2. Interest rates and economic growth
There are now forecasts from serious finance players like JP Morgan and KPMG predicting several interest rate cuts in the coming 12 months.
JP Morgan now sees a “terminal” cash rate of 0.5 per cent. Fortunately, for borrowers, and home owners, interest rates are set to settle at record low levels… making mortgage payments a little easier.
So what’s the connection between interest rates and the dollar?
Here’s the simple idea: the higher the interest rate, the stronger the currency (up to a point). The fact is investors are drawn to bonds and cash accounts with high interest rates attached. You need to convert your currency to the currency associated with those bonds… so there will be stronger demand for the currency of the country with the high interest rates.
In addition, rising interest rates indicate a strengthening economy. That will also raise the value of a currency.
State of Play
So, if you consider what I’ve written so far, it’s easy to understand why the dollar has recently fallen below .70 US cents.
Interest rates are already low and are set to fall further. Moreover, there’s every expectation Australia’s economic growth will continue to slow.
Adding insult to the dollar’s injuries, analysts believe the price of iron ore may have peaked. That means while it may hold its value for a time, the price should fall over the coming years.
What could push the dollar even lower is the global economic backdrop.
The world’s two biggest economic super-powers are locked in a trade war. An escalation of the trade war would be enough to see the Aussie dollar – which trades as a bit of a bellwether for the global economic mood -- fall.
In addition, accounting form EY warns if US-imposed tariffs hurt the Chinese economy, the Australian economy would of course suffer directly as a result, and that would damage the Australian dollar.
Brexit is also playing on the minds of currency traders. That’s not necessarily related to any direct impact a “hard Brexit”, but is more related to the damage a chaotic Brexit would do to the European Union and the affect that would have on the global economy.
Where to from here?
There’s little pushing the Australian dollar ‘north’ at the moment. While there are some forces supporting the dollar, the ‘risks’ as economists like to talk about, are to the downside.
Westpac is now forecasting the dollar to reach around 0.66 US cents this year. HSBC has a similar forecast, while the Commonwealth Bank is a little less pessimistic.
As always, there’s a range of forecasts. If the status quo remains, I suspect the Australian dollar will fall further from here, but not by much.
Under a worst-case scenario, including a serious escalation of the US China trade war, a chaotic Brexit, and a collapse in the price of iron ore (all painfully possible), the dollar could easily test record post-float lows.
The bottom line is that if you’re travelling overseas anytime soon, you’re unlikely to save money by holding out for the dollar to climb. That’s unlikely to happen.
You’ll likely be better off by cashing in now.
And a tip, try to exchange just the right amount of money. That way, if you exchange money now, and the Australian dollar rises while you’re away, you’ll come out on top.
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