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Interest rates
What’s happening with the dollar?
Nathan Lear
Partner/Private Client Adviser
24 Jun 2013
The Australian dollar (AUD) is currently buying around 0.92 US dollars (USD) trading at around two and a half year lows. The AUD peaked at $1.10 in mid-2011 but has been in steady decline since April this year when it was trading at approximately $1.05.
What has caused the recent fall?
Last week Federal Reserve chairman Ben Bernanke announced the US would begin to pull back on its quantitative easing program later this year. This is likely to result in upward pressure on US interest rates.
At same time Australian interest rates have been in steady decline, with possibly more to come.
Over the past few years, higher interest rates have attracted investment into Australia which has pushed up its value. Now the opposite is occurring with Australian interest rates declining and the US showing signs of future increases.
Interest rates are one of many factors that drive the direction of currencies. Another factor that impacts the AUD are commodity prices.
On top of the Bernanke comments, data out of China last week revealed that its manufacturing sector was weakening. It comes as no surprise that the market would then take the view that China is weakening, putting downward pressure on commodity prices and in turn the AUD.
Where will the AUD settle?
For the last 18 months or so the AUD has traded between the range of $1.00 to $1.05.
Some of the dynamics that effect the AUD are changing. Therefore we are likely to see the AUD settle into a new lower trading range, perhaps $0.90 to $0.95. With so many factors driving currencies this is very difficult to predict.
Why are our equity markets reacting badly?
Before I answer this question I would like to point out that the Federal Reserve’s intentions to pull back on its quantitative easing program is a sign the US economy is recovering. However, markets are fickle and with concern that the on-going injection of cash into the US economy might come to a stop.
This recent pull back in the share market is a short term reaction and has no effect on the fundamentals of Australian companies. Our market has been crying out for a fall in the value of our dollar to boost non-mining sectors, such as manufacturing and tourism. Further to this, many Australian companies are global and source earnings from offshore. A lower AUD would result in higher profits when these earnings are repatriated back to Australia.
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 info@hewison.com.au 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.