It’s the day before Christmas, and the Port Phillip Publishing office is just a couple of hours from closing. I don’t have big plans. I’ll just be sticking around Melbourne over the break, taking it easy.
I know many of you are heading off overseas. And after the past few months’ drop in the Australian dollar, there’s a good chance that holiday will be much more expensive than when you booked it. If that weakness continues, in future years it will be more and more tempting for you to take your holidays inside Australia.
Of course that does depend on where you’re headed. The Aussie dollar isn’t down across the board. There are even a select few locations where your spending power will get a boost. But that’s certainly not the case for the US.
If you’re off to the USA, as I am mid-next year, your Aussie dollars will buy you 13.5% less than they would have six months ago. Accommodation, food, and shopping in the US is much more expensive for Aussies today than it was two years ago — the last time I visited. Back then, the Aussie was buying US$1.05. Today it’s trading at US$0.82 — that’s 22% less handed over the FX counter.
Funds have been flowing into the US as confidence in its economy returns, and ahead of an expected interest rate rise next year. And the greenback is expected to keep climbing into 2015. At the very least, I expect it to stay where it is, as a bounce in the Aussie seems highly unlikely. And especially so now that there’s talk of the RBA cutting rates next year. Maybe the US isn’t the place to visit in 2015.
But the US dollar isn’t the only currency that’s strengthened against the Aussie this year. In the past six months, the Aussie dollar is down against a host of other currencies:
13.5% weaker against the Chinese yuan
12.4% weaker against the Thai baht
9.8% weaker against the Indonesian rupiah
8.6% weaker against the Singapore dollar
5.4% weaker against the British pound sterling
3.8% weaker against the euro
2.5% weaker against the New Zealand dollar
However, as mentioned, there are a select few destinations that will give you more spending power than six months ago.
When looking for favourable exchange rates, you might consider Brazil, where your dollars will be worth 4.5% more against the real than six months ago. I was there last year and definitely recommend it.
Another option is Japan. The yen has been falling steadily over the last 18 months, as the Japanese economy entered recession. The Aussie will now buy you 6% more than it did in mid-2013. However, inflation has jumped this year, which takes a bite out of your spending power.
Where your dollars are worth 40% more
Yet there’s one place your dollar will go much further. That place is Russia.
In the past six months, the rouble has tumbled 40.3%. Much of that fall has come in the last two months, during which the currency lost 25% of its value against the Aussie.
Oil and gas contribute half of Russian government revenues, so the crashing oil price has much to do with the rouble’s woes. Sanctions on Russia’s financial, energy and defence sectors by the EU and the US in response to Russia’s conflict with Ukraine haven’t helped either.
A former Russian finance minister says Russia is facing a ‘full-blown economic crisis’. Inflation is headed towards 10%, and rising quick. And interest rates are now at 17%. So while things look dire for the Russian population, if you’ve always wanted to visit Russia, this might be your opportunity.
In recent years, Russia has been a mecca for global luxury brands. In light of the rouble’s decline, you could conclude it’ll be rich pickings for travellers to Russia. However, many international brands are already adjusting prices in the wake of the currency crisis. Clothing retailer Zara closed its Moscow store earlier this month. And just this week Apple raised iPhone prices in Russia by 35%, its second increase in less than a month to offset the rouble’s plunge.
However, no matter how cheap it gets, it might not be a destination of choice. The Australian Government’s Department of Foreign Affairs advises ‘Australians to exercise a high degree of caution in Russia because of the threat of terrorist activity and the level of criminal activity’.
Maybe the US isn’t such a bad idea. And the US dollar isn’t really that expensive. I have memories of the Aussie buying not much more than US$0.50 when I lived in the US many years ago. And the sheer volume of goods and services continues to keep costs in the US relatively cheap compared to home.
Wherever you are, stay safe, enjoy your Christmas break and have a prosperous New Year.
for The Daily Reckoning Australia