Q: Earlier this year you stated the downward trend of the Aussie dollar ($A) from 2011 is likely to continue. Is this still the case?
A: Yes. Over the last year or so the $A has been stuck around $US0.72 to $US0.78. This is due to increases in prices we’ve received for our key exports (like iron ore) and the US Federal Reserve raising interest rates by less than the market expected.
Also, the Reserve Bank of Australia (RBA) cut interest rates further, which prevented the $A from going up too much.
Over the next few months, our dollar may bounce around a bit, but by year end it’s likely to be lower at around $US0.70 (or slightly below). This is based on the iron ore price and other commodities settling down a bit and the US Federal Reserve increasing rates at the same time as the RBA is on hold. The latter will have the effect of making it less attractive for global investors to hold Australian dollars.
Q: What could happen to the $A if there are political flare ups overseas?
A: A flare up in geopolitical risk would usually be negative for the $A, as it would increase concern about global growth prospects and hence the outlook for commodity prices, like iron ore. This would be the case if the flare up related to, say, President Trump setting off a trade war with China or wider political tensions around the South China Sea.
Q: What does the state of the $A mean for investments, such as shares?
A: If the $A goes down by year end, it would be positive for the Australian share market. This is because a falling $A will boost the earnings of Australian companies with offshore operations and make them more competitive globally.
Investors should consider unhedged global shares (which are exposed to $A fluctuations) because the value of global shares will go up as the $A falls.
This strategy could also provide investors with some protection against an unexpected downturn in global growth, as the value of foreign currency would go up against the $A, providing an offset to any losses in global share markets.
Q: What does it mean for exports?
A: A lower $A will make Australian exports more competitive internationally because it’s cheaper for people in foreign countries to buy them with their foreign currencies. This would also help the Australian economy continue to grow further.
Q: How will it affect those who plan to go overseas? Any tips?
A: The downside of a lower $A is that it makes imports more expensive and with this the cost of foreign holidays. The trick for travellers might be to focus on countries whose currencies may also fall against the $US and hence see little change against the $A. This would include Europe and the Euro.
Q: Are there likely to be any other effects, such as a change in global economic growth?
A: Moves in the value of the $A are a useful absorber of global shocks to the Australian economy. For example, if global growth unexpectedly deteriorates, again this would most likely push the $A down even further. In turn this makes life easier for our exporters and tougher for importers – all of which helps offset any negative impact of lower global growth on the Australian economy.
The current pullback in shares has been triggered by a range of things and there may be more downside. Shane Oliver explains what investors should keep in mind.