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The Australian Dollar (AUD)
Where is the Aussie Dollar headed?
Simon Curtain
Partner/Private Client Adviser
11 Oct 2012
The Australian Dollar (AUD) has been hovering at or close to US$1 for a couple of years now – is this a new equilibrium or will the Dollar increase further in value? On the other side of the coin, what is stopping the Dollar from declining back to the US$0.70 – US$0.80 range it spent much of the past decade in?
Let me start by saying that currency markets, like share markets (and perhaps even more so than share markets!), are difficult to predict over the short term. What we can do however is pick out themes that may affect the value of the Dollar. I have highlighted three such themes below:
Interest Rate Differential
International investors, like all investors, want to get the most value out of their assets. Interest rates in Australia are 3.25 per cent which is well above rates in the US, Europe and Japan at 0.25, 0.75 and 0.1 per cent respectively. Higher interest rates attract investment into Australia which in turn pushes up the value of the Australian Dollar.
If Australia continues to have relatively higher interest rates we would expect the value of the Aussie Dollar to remain buoyant, however with Australian interest rates expected to fall to around 2.75 per cent over the next 12 months, the value of the Aussie Dollar could come under pressure.
Commodity Prices
Commodity Prices have fallen by around 15 per cent over the course of this year. With commodities making up around 70 per cent of Australia’s exports, lower commodity prices can have a negative impact on the Aussie Dollar.
Credit rating
Australia is one of the few developed nations to hold a AAA credit rating. While International Investors what to get the most return out of their assets, they also want to ensure this is done with the least amount of risk.
Our AAA credit rating helps keep money flowing into the Country as we are seen as somewhat of a safe haven. This increased flow helps underpin the value of the Australian Dollar.
As you can see, there are many variables that determine the value of our Dollar. While I am not going to go out on a limb and predict the value of the Dollar at a future point in time, it is clear to see that the value of our Currency could come under pressure if commodity prices remain subdued and interest rates continue to fall over the next few months.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email [email protected] or visit www.hewison.com.auPlease note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.