Editorial July 2013 Where is the Aussie Dollar heading? After having an extended period of being above parity with the U.S. Dollar, the Australian Dollar appears to be back on the rollercoaster with its value falling recently into the nineties. So why is this happening all of a sudden and where is it heading? Can we expect more falls, or could it bounce back? As with all economic market predictions, there are a variety of factors at play and economists will give a spread of opinions on where they think the value will end up. The reality is that as long as sentiment plays a part in determining market values, it is impossible to give definitive answers to these questions. What is possible, however, is to examine what major factors are impacting the currency value so that we can better understand why this recent volatility has come about. The big picture Jason Burgmann offered some plain English insights into how the wheels of economic activity around the world can have an influence on the Australian currency. “Basically, the recent falls have resulted from a combination of factors, which either indirectly or directly put downward pressure on the Australian Dollar. Firstly, the recent cut in the cash rate by the reserve bank makes it less attractive for overseas investors to put their money into Australian Dollars. Less demand serves to lower the value. Lower commodity prices also have the effect of reducing overseas demand for Aussie Dollars.” “At a broader economic level, the state of the Australian economy in comparison to the U.S. economy can have an impact. While Australia has enjoyed relatively strong economic growth and favourable terms of trade in the last few years, the forecast for the near future is a bit softer. In particular, the weakening in commodity prices has taken the heat out of Australian growth. At the same time, there has been some positive economic data coming from the U.S. indicating some long awaited recovery. This takes the upward pressure off the Australian currency and gives the U.S. dollar a boost, so the two currencies are coming back into equilibrium.” “It’s also important to remember that these dynamics are not always based on factual data or quantifiable measurements. A lot of what happens is based on less predictable factors, such as market sentiment. Australia has been ‘flavour of the month’ internationally for some time now, so as soon as any of that gloss comes off, world markets will be emotionally swayed more by movements within other economies.” Punching above our weight Many economists also believe that the Australian Dollar has been over-valued during its period of superiority over the greenback, as Jason explains. “Just as can happen in any investment market, the surge in demand for Australian Dollar has pushed its value perhaps a bit beyond its justifiable worth. The correction we are going through could therefore be seen as just bringing things back into balance and in that respect it is not unusual.” So where to from here? The recent fall in the Australian Dollar has sparked a lot of speculation about where it might head, how far it might fall and whether it is realistic to expect it to return to parity with the U.S. Dollar. Jason says that he is telling his clients that there could well be a period of volatility and a case can be made for both an upward or downward trend. “Economists are generally telling us that on balance there seems to be more factors that suggest the Australian Dollar still has a little way to drop by the end of the year. The cash rate possibly going even lower and the continued weakening of commodity prices seems to suggest that money won’t be flocking to the Australian Dollar in the same way it did post the financial crisis of 2008-09. “Then there is another school of thought that says Australia’s close economic links with China are an overriding factor that strengthens our currency and may still see it rise again. As long as Chinese growth continues with its general trend of the past ten years, there will be some reflected glory shining on the Australian economy and international investor perceptions will remain positive. Whether that translates into a stronger currency is the question that no one can really answer with any certainty.” Keeping on top of it all Jason cautioned against personal investors overreacting to volatility in currency markets. “Our advice to clients when they express concerns at volatility is to keep focused on their own long term goals. A properly constructed and well diversified investment portfolio will be able to absorb any consequences of currency movements over the medium to long term. If someone was investing purely by speculating on currency markets, then it would be a concern to see such fluctuation, but if good investment practices are followed then movements in currency are nothing for investors to be too worried about.” * Jason Burgmann is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. Warning: This editorial does not consider your personal circumstances and is general advice only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances. Past performance is not an indicator of future performance.
Posted on: Thu, 04 Jul 2013 22:43:29 +0000
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