We can’t get over this
The Aussie dollar is staying high, but it’s worrying investors
CONTRARY to many predictions, the value of the Australian dollar appears stuck in that US78-80c range when many believed it would be 10-20 per cent lower. So why is it staying stubbornly high and, as a result, how does that affect your investment strategy? To put all this in perspective, the long-term average of the Australian dollar against the greenback is in the mid to low US 70c range. At around the current US80c it is above the historic average and many currency gurus are saying take advantage of it while you can, because it won’t last. But when that fall back to the historic average comes is anyone’s guess. In the meantime, be aware of what drives the value of our currency and when those drivers start to falter you’ll know when that drop is coming. The Australian dollar is basically being driven by interest rates, commodity prices and the low US dollar. Australia has the highest official interest rates in the world, and we have a good stable economy. So when an overseas fund manager is looking at maximising the income returns on their investments, they’re automatically attracted to putting their money here because they get a better interest rate without a big increase in risk. That means more investment dollars flowing into Australia chasing higher interest which, in turn, pushes up the value of the currency. Overseas investors also see Australia as a giant quarry. We are a trading nation, and a lot of that trade centres around natural resources, such as iron ore, coal, copper, and gold being shipped primarily to China. When commodity prices rise, overseas investors see Australian resource stocks as a way of riding the commodity sector and as exposure to a growing China. Many predicted a lower Australian dollar based around a stronger American economy pushing their interest rates higher which would boost the US dollar. That started to happen... then along came Donald Trump. He has created political and economic uncertainties so the Federal Reserve has put interest rate hikes on hold. This change to expectations has meant the value of the US dollar has stayed low in value, which keeps the Australian dollar higher than expected. For investors, some advisers are recommending investing in US dollars and euros themselves because if those currencies appreciate against the Australian dollar, you’ll make a profit based on that. For shoppers and travellers, holidays overseas and buying online means your Aussie currency buys a lot more. Imported goods like electricals (how cheap can TVs get?), technology and cars have dropped and we’re being cushioned at the pump from rising oil prices. For small business, the high value of the Australian dollar means any imported machinery or office equipment is dirt cheap. But the downside of a high currency is that our exports are less competitive and that can hurt the economy. When the currency drops, our exports will be more competitive and will hopefully help these industries which are battling for survival. For investors:
A high Aussie dollar benefits companies which are big importers like retailers or airlines whose huge petrol bill will reduce in value. Exporters will be disadvantaged. If the dollar falls then the reverse is true and companies with big overseas operations will benefit.
The biggest impact of a high Australian dollar is that it becomes more expensive for foreign investors to buy here. But those foreign buyers would have already been affected by changes to stamp duty laws. If the currency falls then those foreign buyers could start refocusing here.