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A traveller’s guide to exchange rate forecasting

28th August 2018
Foreign exchange forecasts; interesting for some, a necessity for many and confusing for all. 
 
At Travel Money Oz we realise that, unless you work in the world of finance and economics, you probably don’t fully understand what elements go in to predicting exchange rates (nor really care – c’mon, we’re realists here).
 
Apart from a snippet of how the Aussie dollar is performing against the USD from Kochie in the mornings, most people only really pay attention to exchange rates and AUD forecasts when it comes to planning a holiday. 
 
Even then, a lot of travellers leave monitoring and purchasing their foreign currency until the last minute, meaning they often forsake a bit of spending money for the convenience of a last minute exchange.  
 
 
From an Aussie traveller’s perspective, we will always want the AUD to be performing better against other currencies. However, an Aussie dollar that is ‘too strong’ can impact our export ability as our goods are more expensive on the world stage. This can potentially lead to things costing more at home, making it harder to save for travel in the first place.
 
Having a basic understanding of what affects foreign exchange rates, as well as foresight on Australian dollar predictions  between now and your next holiday can not only leave you more knowledgeable (hello Tuesday night trivia), but also with a little bit of extra spending money in your back pocket. 
 
Don’t believe us? Check out the difference between some highs and lows in our top currencies over the past 5 years…  Of course we know most people don’t plan holidays 5 years in advance (kudos to you if you do, I don’t even know what I am having for dinner tonight), but it gives you an idea of how much currency can fluctuate over time. 
 
 

 

Alright, we get the point. Forecasting seems hard though..?

You’re not wrong there, friend. Exchange rate predictions are harder than dodging magpies in spring. There are countless methods used by financial analysists each day to predict currency movements. None of these methods are foolproof, so businesses and individuals will often analyse a few predictions before making an informed decision. 
 
Most of us will not delve in to the intricacies of exchange rate forecasting in our lifetimes (except those completing an economics degree). However, an understanding of the long run relationship between macroeconomic fundamentals – explained below - and exchange rates will help you make an informed decision about when to exchange your AUD for that foreign moolah.
 
So, settle in with a Tim Tam and stick with us, we promise* it will make sense in the end. 
 
Before we get started, let’s outline a few quick terms. Impress your colleagues and drop these bad boys into your next convo at the office water cooler. 
 
Appreciation: When the value of one currency increases relative to another. E.g. If the AUD went from 0.69USD to 0.71USD it has appreciated (and Aussie travellers appreciate that). 
 
Depreciation: You guessed it; this is when the value of a currency decreases relative to another. E.g. If the AUD went from 0.71USD to 0.69USD it has depreciated. (Depreciation = devo Aussie travellers). 
 
Higher valued currency: cheaper imports (aka online shopping out the WAZOO), more expensive exports and better bang for your travel money buck. 
 
Lower valued currency: more expensive imports (back to DFO we go), cheaper exports and Aussies are worse off with foreign exchange. 
 
Inflation: The rate at which the general level of prices for goods and services is rising and, in turn, a currency’s purchasing power is falling. You know when your Grandma is like “Back in my day I could get 7 gobstoppers, 3 candy bars and a small marsupial for 50c!” and now we’re lucky to get an ice cream from Maccas and a friendly smile? Yeah, that’s because of inflation. Over time the value of a currency decreases as a result of supply and demand factors. 
 
Economic growth: The increase in an economy’s capacity to produce goods and services. Growth is generally good, but not too fast. Good growth is the equivalent of going to the gym every day, bad growth is like injecting steroids for a month and then hoping for the best, yanno?
 
Now, let’s move on to the harder stuff. It’s important for us to preface this with a few key points: 
  • Foreign exchange rates are influenced by a multitude of factors. Ain’t nobody got time to read (or write) about that. So, when it comes to exchange rate predictions, be sure to take all with a grain of salt and have a well-rounded view.
  • Ultimately, exchange rates capture the supply and demand of a currency in an easy to quantify metric. Demand itself is driven by people’s perception of a currency’s value, and this perception is informed by economics, politics and the media. Having an informed awareness of these three elements can certainly help when understanding your spending power at your next vacay location. 
  • The below illustrations capture the concepts at their most basic level. When determining an exchange rate, you must remember that the changes are relative to the other country in which the currency is being compared to.  All elements interact and influence each other separately, so they must be considered all together and aligned with both countries to get a truly holistic view. 
 
 
 
 
 
All of these factors contribute to the political and economic stability of a country. The level of perceived stability ultimately impacts the amount of trust investors have in the country. 
 
More trust = more people willing to invest in country = greater demand for currency = appreciation
Less trust = less foreign capital invested into country = decreased demand for currency = depreciation
 
Depending on where you are going, difference factors will have a higher influence on a currency’s fluctuations. 
 
As individual’s we don’t have a massive impact over what the AUD will do in future. So, from one traveller to another, we recommend you book that holiday, check out what’s going on where you are headed and sign up for currency alerts
 
If you get it wrong and the rates move against you, don’t stress! You can always protect yourself with Rate Guard, it’s free and lets you claim the difference from us within 14 days of purchase. 
 
*No promises, only best wishes and good luck. If you’re really struggling check out some of our other forecasting blogs. Or use Google. Google has the answers to everything. 
 
This blog is provided for information only and does not take into consideration your objectives, financial situation or needs.  You should consider whether the information and suggestions contained in any blog entry are appropriate for you, having regard to your own objectives, financial situation and needs.  While we take reasonable care in providing the blog, we give no warranties or representations that it is complete or accurate, or is appropriate for you.  We are not liable for any loss caused, whether due to negligence or otherwise, arising from use of, or reliance on, the information and/or suggestions contained in this blog.