If you’ve been following the Aussie dollar’s movements over the past few months, you’ll have noticed its steady decline.
At time of writing, the Aussie dollar is sitting at around 71 cents, it’s not looking great if you’re planning an overseas holiday. But if you’re not, then this just may be what you’ve been waiting for.
It’s been 27 years since Australia was in a recession. Many Australians haven’t ever lived through a recession, and many more were too young to remember the last.
Many factors have been in play to help us avoid a recession. The Rudd government credited itself with insulating Australia from the GFC with their stimulus package. Others point to China’s massive infrastructure programs and the huge amount of resources we sold to the Middle Kingdom in those years.
But it goes further back than that.
Since 1983, the go-to move has been to float the Aussie dollar. And it has worked successfully for quite some time.
What does this mean for the economy?
Paul Bloxham, Chief Australia and New Zealand Economist at HSBC, explained to Business Insider how the floating of the Aussie dollar supported economic weakness in the past:
‘The floating AUD has long been Australia’s most powerful economic shock absorber, and it deserves a lot of the credit for the long boom…
‘It’s been a long time coming, but the widening interest rate differential with the US appears to finally be doing what the RBA is likely to have hoped it would do: push the AUD lower.’
As Bloxham explains, with a weaker dollar, there will be an increase in support for inflation and growth.
Business Insider also reported Bloxham stating:
‘A general rule of thumb for Australia suggest that a 5% fall in the exchange rate is about equivalent to the effect of a 25basis point RBA rate cut…
‘Importantly, if the current AUD sell-off mostly reflects USD strength, which it appears to, rather than local economic weakness, this should bolster the impact that the depreciation has on growth.’
Currently in Australia we’re seeing a rise in commodity export prices, which could potentially translate into higher worker wages.
A lower dollar could also see an increase in tourism. It would make it much more affordable for tourists to travel down here and spend.
Business Insider also explains that ‘the weaker Aussie is likely to lift tradable inflation, an outcome that Bloxham says will be welcomed by the RBA given underlying inflation has failed to move back to the midpoint of its 2-3% target for several years’.
So a declining dollar could also see Aussies feel the pinch in their pockets. With the price of fuel so high around the country in recent weeks, a falling dollar could also see prices climb higher.
With retail already struggling, it could be about to become a lot worse for retail and consumers alike. As ABC News explains, ‘Shopping may also become more expensive, as retailers paying higher import prices come under increasing pressure to pass on the rising costs to consumers’.
ANZ senior economist Felicity Emmett does see a silver lining for consumers however:
‘But due to intense competition … from the arrival of so many international retailers in the past few years, it may be harder for retailers to pass on the higher prices to customers’.
Why has the Aussie dollar fallen?
So why has the dollar fallen to a 32-month low?
It’s due to the fact that the US Federal Reserve has been increasing interest rates, while the RBA has left ours on hold.
And while the Fed is predicted to raise rates again in the next few months, according to the ABC, the RBA doesn’t look like they’ll be lifting rates from 1.5% before 2019.
However, it’s not only interest rates that have affected the fall in the dollar. Declining house prices and stagnant wage growth have also played their part.
JP Morgan senior economist Ben Jarman sees the dollar holding steady at 70 US cents. However, if the Fed raises interest rates sooner than expected, well he believes we could see the dollar fall to 68 US cents.
‘The Australian dollar is caught between very supportive factors — high domestic export prices, especially coal and iron ore — but dragged down a little bit from [interest] rate spreads, which are quite negative…
‘And it’s getting more so with the RBA on hold for an extended period, and the Fed likely to hike several more times.’
A falling dollar has the potential for both positive and negative repercussions for consumers and the economy.
This week in Money Morning
In Monday’s Money Morning, Harje opens with how US President Donald Trump doesn’t want China stealing more tech ideas from the US. According to new reports, Trump might not only be right, his words might not be harsh enough. According to anonymous sources, China has gone to extreme lengths to spy and steal from the US military and their most successful companies. Trump has alluded to China stealing secrets. An incident from 2015 is a contributing factor to the trade war we now find ourselves in. Trump continues to kill Chinese mergers and takeovers. To find out more about the incident in 2015, and the battle Trump faces with China, go here.
In Tuesday’s Money Morning, Harje introduces Warren Buffett and how he’s finally caught onto buying Apple stock, because he realises how integral they are to a lot of lives. Despite being very late to the smartphone wave, he’s generating billions from it. Harje explains how this is a great example of how you can profit from obvious trends. Being second means you have the luxury of investing with a whole lot more certainty. Instead of buying Apple in the 1980s, when their future was uncertain, you can buy the stock today and bet on their continual success. As Harje explains, if certainty is your game don’t bother being first. Sit back, find out what works and then load up your bets. To find out more, go here.
On Wednesday, Harje returned to the chip infiltration story. In a letter to lawmakers on Monday, Apple said that they never found any evidence of Chinese tampering in their software. The story claims that after months of research, they found Chinese plans to spy and steal from the US. Almost immediately, Amazon and Apple came out to bash the story. It became clear that both companies wanted the story to be dead and buried. But where did Bloomberg get the 17 sources confirming that they saw suspicious chips? Why would it take Bloomberg more than a year and hundreds of interviews to fabricate a story? Harje gives a bunch of evidence and examples of instances where Chinese chips were found in other places such as kettles and irons in Russia in 2013. Clearly China has the capability. So why is the government, Apple and Amazon so quick to shrug this whole thing off? To find out more about this story, go here.
In Thursday’s Money Morning, Harje discusses macro predictions, and explains that they are a guessing game and that both short and long-term bond yields are going up together and are in multi-year highs (in the US). He goes on to further ask the questions: How does this all affect you? What caused our recent market drop? The largest 500 Aussie companies are trading lower because of what’s happening to US bonds. Bond yields are affected by bond prices (the lower the price the higher the yield and vice versa). So, if investors believe interest rates will rise in time, the curve will be upwards sloping. The longer it takes for a bond to mature, the higher the yield needs to be for investors to buy. There’s a lot of worry out there that could drive investors into bonds. This could lift the price of longer maturity bonds, pushing down their yields, making the curve flatter. As the yield curve gets steeper, investors will start to question stock prices. At the moment, stock price are high in part because of low interest rates. To find out more about how Harje sees this all playing out, go here.
In Friday’s Money Morning, Harje looks at how investors could potentially profit from coffee. Today, most coffee drinkers will tell you they enjoy the experience or drink coffee out of habit. And it’s these two qualities which have made companies like Starbucks Corporation [NASDAQ:SBUX] a fortune over time. Bill Ackman of Pershing Square Capital has bought roughly US$900 million of Starbucks stock. He believes their push into China might be the key to kick stagnating growth. But the Chinese are heavy tea drinkers, not as coffee-reliant as many Western countries…so how could this pan out? Well, those that do drink coffee see it as a treat. An experience to have after work or on the weekend. But I’ll bet Ackman is banking on Starbucks’ ability to turn coffee into an everyday habit among Chinese workers. To find out more about this venture, go here.
Editor, Money Weekend
PS: Revealed today: How Aussie investors could cash in on uranium’s next blockbuster breakout. Free report available now.