For the last nine months, we have watched the Aussie dollar fall, and last week it reached its lowest level in two years as global markets and investors reacted to challengest facing the Australian economy.
So why is the AUD dropping so much?
Long story short, it can be attributed to a lower demand for the AUD as a result of decreased investor confidence in the economy. This can be broken down to some key international and domestic factors:
Global trade: Surprise surprise, Trump is in the thick of heavy trade negotiations that lean towards adding tariffs to Chinese goods. Imposing tariffs on China not only decreases the demand for their goods, but also the Aussie resources required to create them.
Increasing US interest rates: As the US economy improves, the need for low interest rates become less apparent. Higher interest rates in the States means investors move their funds to the USA to take advantage of an increased return on their capital.
Emerging market weakness: The last 6 months has seen massive falls in other country’s exchange rates. South Africa, Argentina, Turkey and Brazil have witnessed hefty depreciation in their currency. This has increased risk aversion for investors which, in this case, has weakened the AUD.
All of these factors have resulted in decreased demand for the Aussie dollar.
Lower demand = downward pressure on the AUD value
Large household debt and falling house prices: While first home buyers may rejoice at falling house prices in Sydney and Melbourne, it has impacted the economy in a number of ways.
Consumer sentiment and perception of wealth falls alongside house prices. A.k.a. people stop spending as much when their house price doesn’t rise. This was confirmed this week in increasingly low retails sales numbers.
Interest rate expectations: Until recently the RBA had put a hold on rates since August 2016. For 18 months or so the market was expecting the next move in rates to be an increase, however low wage growth and low inflation has led some economists to speculate that there may be another drop in rates. This, coupled with the USA’s rate increases, leads investors to move their capital elsewhere seeking a higher return.
What does this mean for Aussie Travellers?
Traveller in front of departures board at airport
Sorry to say, but it’s more than likely that you’re not going to get the most bang for your buck when exchanging AUD for the majority of international currencies, especially USD.
Whether the AUD continues to fall or not, if you are heading overseas shortly we recommend grabbing your cash sooner rather than later to ensure you don’t forgo any more spending money than necessary. Add Rate Guard to your transaction (it’s free and available when you buy in store!) and rest assured that if the rate does improve within 14 days of purchase Travel Money Oz will refund you the difference.
Find out more about exchange rate predictions for travellers.
If you have just returned from your trip overseas and have some leftover cash, you can cushion those post-holiday blues with some Aussie spending money. The low Aussie dollar means you will get more when selling it back to us in exchange for your foreign currency.
Light at the end of the tunnel.
A low Aussie dollar isn’t the end of the world for our economy; however it can be a real burden on your holiday travel money.
The good news is exchange rates will get better. The lowering AUD will spark inflation as imports become more expensive and exports become cheaper; the AUD depreciation we’re seeing will also help demand for Aussie exporters, especially our farmers currently experiencing an unprecedented drought.
As that quote your mum shared on Facebook once said “You have to get through the storm to see the rainbow”. Exchange rates act as a beautiful automatic stabiliser to an economy. Whilst we may see a lower AUD before this stabilisation comes into effect, those planning international holidays for 2019 don’t have to hit the panic button quite yet.
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