Dr Shane Oliver, Head of Investment Strategy and Chief Economist at AMP, analyzes the Australian dollar.
Key points
Introduction
Changes in the price of the Australian dollar are vital because they have an effect on the foreign competitiveness of Australian exports and the burden of imports, adding to the burden of overseas holidays. They are also vital for investors because they have a direct effect on the price of foreign investments and indirectly the functionality of domestic assets such as shares through their effect on Australia’s competitiveness. But currency movements are also notoriously difficult to predict. Late last year it looked like the Australian dollar was still on the road to recovery, but it peaked in December and fell back to $0. 64. Lately, it has looked stronger again, surpassing $0. 67. So maybe the five reasons we thought drove the dollar higher in a note last November (see here) are, despite everything, starting to work?
Aussie weakened since end of mining boom
But first a little history. In 1901, one Australian dollar was worth US$2. 40 (having been exchanged from the British pound to Australian dollars before 1966), but this is a long decline to a low of about US$0. 48 a century later. . See the blue line in the table below.
Thanks to the mining boom of the 2000s, the Australian dollar returned to 1. 1 US dollars in 2011, its highest point since 1981. But since 2011, the Australian dollar has generally been in a bearish end, shortly bottoming out at around $0. 57 the pandemic, after which there was a large rebound in 2021 to around US$0. 80, but with a rapid recovery from weakness. The main points of weakness since 2011 have been: the end of the commodity boom; develop considerations on the outlook for China, which accounts for about 35% of Australia’s product exports; a narrower spread between Australian and US interest rates (making it less attractive for investors to put their money in Australian dollars); and a long-term increase in the price of the U. S. dollar overall. See the table below.
But there are still five reasons to expect the Australian dollar to rise.
In November, we saw five reasons to expect an increase in the A dollar. These remain largely valid and the A dollar seems to be recovering again.
Where do you go from here?
We expect the combination of an earlier and more competitive Fed cut than the RBA, a drop in the US dollar at a time when the Australian dollar is undervalued and positioning towards it is still short, will push the Australian dollar higher. above or above 0. US dollars. 0. 70 next year.
Recession and a new industrial war with Trump are the main risks
There are two major threats to the dollar. The first is that if the global and/or Australian economies go into recession, this is not our base case, but it is a very important threat. The current big threat would be if Trump is elected and starts a new global industrial war with his plans for a crusade of price lists of 10% on all imports and price lists of 60% on imports from China. If any of those things happen, it can lead to a further fall in the Australian dollar. , as it is a growth-sensitive currency, and a rally in the defensive US dollar.
What would an emerging Australian mean for investors?
For Australia-based investors, a rise in the Australian dollar will reduce the price of foreign assets (and thus their returns), and vice versa, a fall in the Australian dollar. The fall of the Australian dollar over the past three years has taken global equity returns in Australian dollars a step forward. When making an investment in foreign assets, an Australian investor has the option of being hedged (eliminating this currency impact) or unhedged (leaving the investor exposed to adjustments in the A dollar). Expecting the Australian dollar to continue rising over the next year, investors continue to focus on more hedged exposure to their foreign investments.
However, this should not be taken to the extreme. First, financial forecasts are difficult to identify correctly. And with the recession and geopolitical threat remaining high, the Australian dollar’s rally may prove short-lived. Second, holding foreign currency in an investor’s portfolio through unhedged foreign investments is a smart way to diversify if the economic and commodity outlook deteriorates, as significant declines in global stocks have tended in recent decades. to cause sharp falls in the Australian dollar, which has offset the fall. overall share price for Australian investors. Currency exposure therefore provides a smart hedge against threats to the global outlook.
Ends
Important Note: While every care has been taken in the preparation of this document, neither National Mutual Funds Management Ltd (ABN 32 006 787 720, AFSL 234652) (NMFM), AMP Limited ABN 49 079 354 519 nor no other member of The AMP Group (AMP) makes any representation or warranty as to the accuracy or completeness of any content including, without limitation, any forecast. Past functionality is not a reliable indicator of long-term functionality. This document has been prepared with the objective of offering general data, without taking into account objectives, monetary scenario or specific needs of any investor. An investor should, before making any investment decision, consider the suitability of the data in this document and seek professional advice, taking into account the objectives, monetary scenario and needs of the investor. This document is for use only by the party to whom it is provided. This document is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.
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