What the Lower Australian Dollar Means for You

As of this morning, one British pound buys two Australian dollars. That’s right — if you were going on a holiday to England today, your spending money would effectively be halved.

The Australian dollar is also lower against the US dollar. At the time of writing, $1 is worth just $0.77. So maybe now isn’t the time to go on an online shopping spree in US stores.

But seriously, there’s more to a lower Aussie dollar than holidays and overseas purchases getting more expensive.

Why the lower dollar isn’t automatically good for business

Normally a falling Aussie dollar would be good for exporters. It would be easier for them to sell their stuff, and they’d get more dollars for it. But the world prices for the things we export — everything from metals and minerals to food — has been falling.

This has meant that a lot of the benefit of the lower Aussie dollar has been eaten up by lower prices. For example, let’s say an Aussie company exports widgets to the world. The widgets are priced in US dollars. At the start of the period, the widgets have a market value of US$1 each, and the company sells 100 of them. So they get AUD$121.95, because the exchange rate is $0.82 per US dollar.

Then the exchange rate drops to $0.77 per US dollar.

We could complicate that analogy by saying the Aussie company needs to import something that’s rising in price in order to make their widgets. But you get the picture.

Why the dollar kept falling

The Aussie dollar fell because of weak capex data released by the ABS. Capex is short for capital expenditure. It’s a set of data released by the ABS that shows how much private businesses are spending on new assets. It includes things like new buildings, other structures, and machinery.

The latest capex figures were released yesterday. They showed that total new spending is down 2.3% compared to last quarter, and 5.7% compared to last year.

capex

Source: abs.gov.au
[Click to enlarge]

This means businesses aren’t making a lot of new purchases within Australia. Which is a sign that our local economy is slowing down.

It’s the RBA’s job to help keep the economy in good shape. So when they see signs like bad capex data, they might think about trying to do things to boost the economy. Like lowering interest rates.

When the market has a reason to think the RBA might lower interest rates, it can mean the currency moves first. A higher interest rate usually means a higher dollar, because higher interest rates mean higher yields on investments within Australia. This is attractive to foreign investors. They have to buy the investments in Australian dollars. This drives up demand for our currency.

A lower interest rate means the opposite. So if the market expects a lower rate, they might try to beat the lower demand for our currency by selling their Aussie dollars first.

What this means for you

Unfortunately, this means you might feel the pinch of higher prices before you feel the benefit of a (potential) rate cut. Even if you’re not going on holiday or buying stuff from overseas. For example, if you’re a customer of a business that imports things from overseas (remember, that’s more expensive when the dollar is lower). You might notice that their prices are higher, or that they have fewer sales and specials.

Or, if you’re an investor in a business that needs to import its inputs from overseas — if the business is paying higher prices for its inputs, it might be less profitable.

If you’re watching anxiously — for whichever reason — you might just have to wait until the next interest rate decision to see how you’ll be affected.

Eva Mellors,
Contributor, Money Morning

PS: A lower dollar doesn’t affect all companies equally. Some companies are more influenced by other factors. If these other factors are positive, it doesn’t matter if the dollar is down.

In his report ‘The Five Best ASX Stocks for 2015’, Kris Sayce talks about five companies he believes will do well because of factors outside the dollar. Read this report and you’ll learn:

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