The Aussie dollar is slumping, creating winners and losers as well as the possibility of interest rates staying higher for longer.
Key points:
- The value of the Australian dollar, against the US dollar, has fallen about 9 per cent since January
- Many of the things we import are paid for in USD, so they’ve become more expensive
- Inbound travellers and companies that export will benefit from our weak dollar
At the start of the year one Australian dollar would buy you US 71-cents.
But it’s down 9 per cent from then against the key benchmark currency, to sit just above US 64-cents.
Commonwealth Bank currency strategist Kristina Clifton is among those who think it could fall far lower.
“So the Aussie dollar has weakened this year, if we just think back to mid July, when it was at its recent peak has actually fallen about four and a half cents against the US dollar,” she says.
“We’re now seeing a risk that it can potentially fall below (US) 60-cents in the near term”.
That type of fall has impact … everywhere.
Walking on
In the narrow laneways of Melbourne, Fiona Sweetman is leading a tour of international tourists — most of them from North America.
A falling dollar increases the purchasing power of foreign tourists, making their money more ‘valuable’ than it was previously.
That, in turn, influences their decisions on where they will travel and can make Australia a more attractive destination.
“The changing dollar has a huge impact for us,” Ms Sweetman says.
“The exchange rate really makes an impact for the North American market, which is the biggest (segment of) our business. And so they are coming in droves, which is great.”
Seattle’s Lorelea Hudson was already committed to this trip — so she could attend the Women’s World Cup — but the way the US dollar has strengthened against the Australian currency has changed her spending.
“It makes it a lot easier to buy things that we weren’t going to buy, like jewellery and things, so a lot cheaper.”
“We haven’t really worried about money as much because the exchange rate is so good for us. So we’re always going. ‘Oh, that’s not so expensive.'”
The flip side is that Australians heading overseas get less for their money.
At Sydney Airport, departing Australian Joel Horton is off to Honolulu and he says the situation will make him think twice before splashing cash overseas.
“It definitely makes you second-guess and have a think about how much you’re spending over there and the luxuries, compared to being back here at home in Australia,” Mr Horton said.
Mr Horton is looking forward to some “beach time” and eating fish tacos, but he suggests he’ll economise by attending “happy hours”.
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China’s struggles a problem
The issue is much bigger than travellers and even broader than the performance of the local dollar against the US currency, the “greenback”.
Our currency is lower on a “trade-weighted basis”, falling in strength against the currencies that we do most of our trade with.
“Australia trades with lots of different economies out there in the world. We can have a look at our exchange rates, weighted by how much we trade with each of the economies,” Ms Clifton said.
“We trade a lot with China. So our currency against the Chinese currency has quite a big weighting, but we can add up all the all the different countries that we trade in and how our exchange rate is going along against the currencies of those economies.”
And while we’re talking about the US — the real issue is our biggest trading partner.
Rabobank senior foreign exchange strategist Jane Foley put it bluntly from London in a recent report.
“China, Australia’s biggest export partner, has sunk into deflation against the backdrop of rising headwinds,” she wrote.
These include:
- Falling property prices
- Mounting issues for property developers
- Soft retail sales and production data
- Poorer industrial profits
- Elevated youth unemployment.
All of this explains why China’s imports dropped a startling 12.4 per cent compared to July last year.
Even with what’s happening in the domestic Australian economy — low unemployment and a budget surplus — that has a direct impact on the value of the Aussie dollar.
Partly that’s because so many of our key exports, like iron ore and coal, go to China.
A slowdown in its economy and a reduction in demand for what we dig up and ship out means one thing: a hit.
“It will likely take a Chinese stimulus package focused on commodity-intensive infrastructure spending to turn around the downtrend in the Australian dollar against the US dollar,” Kristin Clifton says.
Coffee cost
Joseph Taweel buys more coffee than you ever will.
The general manager of Cofi-Com Trading brings green beans into Australia from 25 countries.
And he pays in US dollars for all of them, which means he has to think about when the best time to buy is.
“You start thinking … ‘Now, is this the low? Is it going to get lower?’ Or is just the low now and we [will] see a rebound in the Aussie dollar,” he asked.
Almost 99 per cent of Australia’s coffee is imported. The falling value of the dollar means Mr Taweel is paying more for the beans.
“It’s definitely adding to the cost of coffee and obviously as an importer and distributor we do pass that on,” he says.
That’s offset somewhat, by falling costs for shipping and a strong harvest lowering coffee prices. But it all adds up.
However, if other importers have to raise prices to make up for the weaker dollar, that could fuel inflation and add pressure on the Reserve Bank to maintain or lift interest rates to fight it.
The good news is that importers of everything from fuel to furniture use hedging, which means setting prices and contracts well in advance, to avoid the impact of currency fluctuations.
Mr Taweel uses hedging to keep the business and its profits safe.
“My attitude is always, you don’t want to be any worse off than you are today. So maybe you should start hedging and taking some cover? A bit like insurance,” he said.
Just another curve
In the early 2010s, our dollar breached what’s called “parity”.
Driven by a mining boom, it meant one Australian dollar was worth more than one US dollar.
But it contributed to the death of our local car industry because the high Australian dollar made our exports more expensive.
As outbound travellers downgrade their accommodation and online shoppers lament higher prices in foreign stores, businesses that have been on the currency rollercoaster see this as just another curve.
“Hidden Secrets has been around the changing dollar for a long time,” Ms Sweetman says.
“It used to be $1.10. It’ll change and fluctuate. We need to manage our businesses as changes happen. We’re ready for the next one.”
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