Why the Falling Aussie Dollar is Good News for Aussies

Why the Falling Aussie Dollar is Good News for Aussies

This week, Aussies got a glimpse of the new $50 note.

I must admit, I’ve always like the design of our paper currency.

For starters it’s pretty and it’s robust.

I can’t tell you how many times I’ve pulled some notes out of the pocket of a freshly-washed pair of jeans. Intact and ready to be spent.

And I suspect the new note will be just as strong. With a few tweaks, though.

The overall size of the note has changed. Plus, it will have four small dots in one corner. Meaning that vision impaired folks will know they are holding a crisp ‘pineapple’ in their hands.

The clear pane is bigger, and there’s a numerical hologram that ‘flips’ when you move the note.

The Reserve Bank of Australia (RBA) claim that these features will help make the note very tough to counterfeit.

While the famous faces stay the same, there’s a new, humorous addition.

Smack bang in the middle of the new $50 note is a black swan.

Who knew the folks at the RBA had a sense of humour?

We knew it was coming

Aside from our central bank making a nod to a popular market phrase, the RBA must be breathing a sigh of relief about the value of the Aussie dollar in international markets.

In spite of peaking at 81 cents in late January this year, the Aussie dollar has spent the year falling against the US dollar.

The Aussie is nudging the 70.4 cent mark as I write this giving us a 13.2% fall in nine months.

The key factor behind the fall is simple.

The Federal Reserve Bank has been increasing interest rates, and the RBA isn’t.

At the start of the year, the Fed and the RBA had the same interest rate of 1.50%.

However, the Fed made it clear last year through their dot plots – that is, the projected path of US interest rates – that the US market could expect three to four rate increases in 2018.

So far, they’ve made good on that. Raising rates at March, June and the September meeting. Leaving the market only waiting on the December meeting.

Ultimately, we knew last year that the Fed would set a higher cash rate than the RBA. Ending our ‘interest rate advantage’ over the US. Something that hasn’t happened in 17 years.

You see, big money tends to flow where it is ‘safe’ and can get the most return.

In other words, it goes into a market where it’s most likely to come back and still earn an income while sitting there.

That means that any money parked in the US would earn more interest per year than it would if it were in Australia.

Simply because the US can offer a higher deposit rate than us.

Plus, given that the US is the deepest and most liquid money market, it’s perceived to be a less risky investment than a currency like the Aussie dollar – whose fortunes are tied to the value of commodities.

The point is, the falls in the Aussie dollar aren’t surprising. The case was laid out last year.

But it could still have lower to go.

Get ready for the Aussie to sink

The 13% plunge in the Aussie dollar has some led to some commentary on the weakness of the Aussie dollar.

However, investors should remember that the long-term average for the AUDUSD cross rate is actually 72 cents.

Meaning that AUDUSD trading above 80 cents for long periods of time is unusual and that today’s price is closer to the norm.

And given that the Fed is not only forecast to raise rates again this December – and has another three rate hikes for 2019 – the Aussie is highly likely to sink even further.

Dropping below 70 cents before the end of this year should be anticipated.

If every rate hike from the Fed goes to plan – and our own central bank doesn’t increase rates – we could be looking at the AUSDUSD dropping as low as 62 cents next year.

Although, that’s on the more drastic side of the predictions. The consensus seems to have our currency sitting around the 64-66 cent mark.

In saying that, if you’re heading to the US next year, you may want to swap some Aussies for greenbacks sooner rather than later.

Worthless Aussie is good for local business

The only people really suffering from the falling Aussie dollar right now are those heading over to the US.

Basically, it means you get less greenbacks when you hand over our polymer notes.

And if the forecasts are right, the Aussie is going to get even lower from here.

For the RBA and companies that deal in US dollars the Aussie is dropping right into that ‘sweet spot’.

The Aussie dropping below the 70 mark is good news for consumption.

Low interest rates means we aren’t likely to attract large amounts of foreign investment.

But the flip side to this is that the weaker Aussie could bump up tourist numbers. Simply because now, international visitors will get more bang for their buck in Australia.

In addition to that, a weaker currency on our end is, again, a draw card for our booming educational sector. Something worth around $24 billion to our economy last year. Suddenly, we look like the cheaper destination to visit, study and live in to migrants.

And the other thing– the weaker AUD may finally be the thing to light a rocket under the Aussie stock market.

Most major commodities are priced in US dollars.

That means ASX miners can expect to get more Aussie dollars in return which will essentially make them look more profitable on paper.

The Aussie dollar may be falling against the US. Not great news if you have a shopping trip in New York planned.

But for all of us hanging out in the sunburnt country, it may be just what we need to stop the economy from going backwards.

Kind regards,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia