Dr. Shane Oliver, chief investment strategist and chief economist at AMP, discusses the Australian dollar.
Key points
Introduction
Changes in the price of the Australian dollar are vital because they have an effect on the external 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 equities through their effect on Australia’s competitiveness. But exchange rate movements are also notoriously difficult to predict. At the end of last year it seemed that the Australian dollar was nevertheless on its way to recovery, but it peaked in December and fell back to $0. 64. Lately, it has looked more powerful again, topping $0. 67. So perhaps the five reasons we think drove the dollar higher in a note last November (see here) are nonetheless starting to work?
The Australian appears weak since the end of the 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 the A dollar to rise. 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 Federal Reserve cut and more competitive than the RBA, a fall in the US dollar at a time when the Australian dollar is undervalued and positioning towards it is still short, to propel the Australian dollar up 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 problem threats for the $A. La first is that if the global and/or Australian economies go into recession, this is not our base situation, but a very significant threat. The great threat of the moment would be if Trump is elected and initiates a new global industrial war with his plans to crusade for price lists of 10% for all imports and price lists of 60% for imports from China. Should any of those occasions occur, it could lead to a further decline in the Australian dollar as it is a growth-sensitive currency, and a rally in the defensive US dollar.
What would an Australian dollar quote 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: Although 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 any another member of the AMP. Group (AMP) does not represent or guarantee the accuracy or completeness of anything contained therein, including, but not limited to, any predictions. Past functionality is not a reliable indicator of long-term functionality. This material has been prepared with the objective of offering general information, without taking into account the specific objectives, monetary situation or wishes of any investor. An investor should, before making any investment decision, consider the suitability of the data contained herein and seek professional advice, taking into account his or her objectives, monetary situation and wishes. This document is intended solely for the use of the party to whom it is provided. This curtain is not intended for distribution or use in any jurisdiction where doing so would be contrary to applicable laws, regulations or rules and does not constitute a recommendation, offer, solicitation or invitation to invest.
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