DAVID JOHNSON, director at foreign exchange specialists Halo Financial, examines the current weakening of the Australian Dollar.
Anyone sending funds to Australia at the moment will get an exchange rate which is 21 per cent better than it was just five months ago and at levels not seen since August 2010.
At a time when average UK wages are rising at just 1 per cent per annum, inflation is running at just under 3 per cent a year and house prices are up just a few percentage points on the year, those lucky enough to be moving funds to Australia are more than 20 per cent better off and all you had to do was wait a little while!
That may sound too good to be true, but it is a fact and there are some pretty straightforward reasons for the change. On the UK side of things, Britain has been posting increasingly positive economic data; unemployment is starting to fall, inflation remains moderate, manufacturing, construction and service sectors are all posting improving results and the good weather and a royal baby (so they say) have conspired to drag consumers kicking and screaming to the shops.
What’s more interesting is that most forecasters are starting to raise their economic growth projections for UK Plc and that ought to mean we will see further Sterling strength; just what you need when you are selling the Pound.
On the Australian side of the equation, the importance of Chinese export sales was crucial to Australia surviving the 2007 crisis and the past five years in good shape, but China is now feeling the pinch. That has the twin effects of reducing demand for Australia’s raw material exports and reducing the global prices for those same commodities. Not only is Australia receiving less orders from China for mined and extracted goods, but the prices they achieve on those orders is also reduced. The net result is that investment in the very substantial mining sector is down and that has repercussions across the whole economy.
The other thing which had been boosting demand for the Australian Dollar was the very attractive yield that Aussie investments offer. The Reserve Bank of Australia’s base rate has been considerably higher than those on offer elsewhere. Even now, after several interest rate cuts, the Aussie base rate is still 2.5 per cent. Compare that to the 0.5 per cent base rates in the UK and Europe, the 0.1 per cent in Japan and the 0-0.25 per cent in America and you can see why international investors would be drawn to Australian assets like wasps to a jam sandwich.
However, as talk of higher interest rates starts to pick up in other countries and the amount of liquidity in foreign bond markets comes under threat through a decline in Quantitative Easing programs, the appetite for higher yielding but perhaps slightly riskier (due to the currency variation) investments in other countries – including Australasia – declines. Hence the start of the weakening cycle we are seeing in the Australian Dollar.
So, the five year decline in the Sterling — Australian Dollar exchange rate looks like it is over and the return to more attractive exchange rates for Aussie Dollar buyers looks set fair to continue. Well, maybe!
The fact is there is no certainty in the recent Sterling — Aussie Dollar upswing. All of the factors mentioned earlier are apt to change. China will gain economic growth from the upturn in the US and Europe so that will, in time, increase demand for Australia’s exports. The UK recovery is still relatively fragile so, if European economies slow or return to decline, the effects on Britain would be significant as Europe is Britain’s greatest market for overseas trade. If demand for Australia’s output picks up in the so called BRICs (Brazil, Russia, India and China) as a whole, then commodity prices will rise and Australia’s export income will grow.
In fact, you could spend a whole afternoon pondering the ‘if’ and the ‘maybe’ of the future of the Sterling — Australian Dollar exchange rate and still be wondering what may happen. The fact is that the variables are too great for anyone to have an infallible forecast for the future for this exchange rate. So what can you do?
Well you have three main options.
The first is to do nothing and hope for the best. You have a 50:50 chance of achieving better exchange rates in the future by doing nothing and for some people, that is fair enough.
The second would be to purchase your Australian Dollars at the current attractive level to remove the risk of a drop in the exchange rate. This can be done on a forward contract through specialist brokers. It ensures you get the amount of Aussie Dollars you want at the current exchange rate, but you don’t physically exchange your funds for up to two years. This is also available for those who have a monthly transfer to make and it makes it a doddle to budget for rental, mortgage, pension and salary payments.
The third option is to manage the risk of a decline in the exchange rate. Some specialist brokers are able to offer automated risk management tools to ensure you fix a worst case scenario and lose no more money even if the Pound collapses against the Aussie Dollar. These ‘Stop Loss’ orders do exactly what they say on the tin. They guarantee you will lose no more than the parameters you set out. So if you want to guarantee yourself at least A$1.70 to the Pound, your order will trigger at that level even if the Pound falls all the way back to the March low of A$1.43.
In essence, no matter what the future holds, you are currently 21 per cent better off than you were in March and you can guarantee you don’t give it all away again.