What does a lower Aussie dollar mean for your investments?
- Published: November 11, 2019
- Author: Herby Weber
The value of the Australian dollar has declined as interest rates have come down. This is positive for some industries and produces downward pressure on others. Here, we explore this dynamic and what it means for investors.
Benefits of a lower dollar
Exports tend to benefit as the currency drops and goods sent overseas become cheaper and more competitive. Sectors that may benefit include agriculture including wheat, wool and food, as well as resources, services including tourism and education and technology such as specialist IT solutions.
Drawbacks of a lower dollar
In contrast, imports will tend to suffer as the price of the local currency declines. In some cases, higher costs may not be passed on. Instead, they may be absorbed in a potentially already-stressed environment, causing importers’ profits to decline. Alternatively, the declining dollar may lead to price increases for certain imports, for instance petrol, notwithstanding other regular variables that lead to price fluctuations such as supply and demand dynamics.
Goods and services such as software licenses, hardware including whitegoods and computers may also suffer as the dollar drops. Travel and overseas purchases also become more expensive as the buying power of the Australian dollar is eroded.
Funding costs for banks may also increase as the value of the dollar declines, as many of their bonds are sourced from overseas and denominated in foreign currencies such as the US dollar. In the longer term, this may have an impact on margins, which may negatively impact the interest rate differential financial services sector businesses experience between deposit-taking and lending. Large corporations’ funding costs may also increase as they also issue bonds overseas.
The investor approach
It’s also worth understanding how fund managers approach fluctuations in the currency. Some investment managers will actively hedge away their currency exposures, while others want this exposure. They also look at currency from a number of perspectives, taking into account the fact some currencies such as the US dollar and Swiss Franc are considered safe havens in times of financial turmoil and uncertainty.
Retail investors may choose currency-unhedged investments, where no exchange rate is fixed, if they wish to be exposed currency movements. They may also choose currency-hedged investments, if they wish not to be exposed to currency movements. Many international managed funds offer both options.
If investors choose to switch between hedged and unhedged versions of an investment, it’s important they understand any switching costs and tax implications from taking this step (although this won’t matter in a zero-tax environment, such as super funds in pension phase). Any shift must also fit into the investor’s strategic long-term planning.
It’s very difficult for investors to pick and profit from currency movements. So it’s a good idea to consider the long-term implications of any decisions around currencies and draw on the insights of professionals when thinking about how currency movements may affect your portfolio.
The information contained herein is of a general nature only and is not intended to be relied upon nor is it a substitute for appropriate professional advice. Whilst all care has been taken in the preparation of the material, it is not guaranteed to be accurate. Individual circumstances are different and as such require specific examination. Asparq cannot accept liability for any loss or damage of any kind arising out of the use of or reliance upon all or any part of this material. Additional information may be made available upon request.