We can’t get over this

The Aussie dol­lar is stay­ing high, but it’s wor­ry­ing in­vestors

Central Telegraph - - LIFE | FINANCES -

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:

SHARE MAR­KET

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.

PROP­ERTY

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.

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