It’s been a one way street since July last year
Leading up July 2017 the A$ was on a bit of tear. Commodity prices were rebounding, the property market was still hitting new highs and there were rumblings in the halls of the Reserve Bank of Australia (RBA) that interest rates locally might need to be lifted sooner than had been expected. Then things changed.
Whilst the A$ has proven to be stubborn in its resistance, especially against the US$, the sheer weight of headwinds has taken its toll and almost across the board, the little Aussie battler has fallen against a vast array of cross currencies (including those in South East Asia).
Now the move is a long way short of what happened to the Pound following Brexit, but it has been consistently weaker over the past 12 months. So just what has happened?
Whilst the A$ has had modest falls against the Indonesian Rupiah (-1.4%) and the Philippine Peso (-3.43%), its been a little more pronounced against the Vietnamese Dong (-5.44%), the US$ re Cambodia (-6.03%) and Singapore Dollar (-8.25%). Then it gets a little uglier, as we’ve seen a fall of 10.50% against the Thai Baht, and over 13.4% against the Malaysian Ringgit – Ouch!
What’s the reason for the weakness, and what happens next?
Hah, that’s the million dollar question (or perhaps the Thai Baht 23.93 Million question). There are number of variables at play, and if you were to bump into an FX Analyst in a Bali bar, or on a Vietnamese Beach, they’d tell you its one of the most difficult of all instruments to predict. But here’s a few thoughts.
Current (and recent) key indicator announcements on the Australian economy have been very subdued. These include GDP expectations, inflation and perhaps most importantly wage growth (or the lack of it). Yes, you will read headlines that unemployment is low (by historical standards) but this number becomes murky when you consider how many people are actually ‘underemployed’, that is they have some work but would like a lot more.
And as mentioned, many people haven’t even had the sniff of a wage increase in years. But the bills keep pouring in, which constricts their spending ability and this stagnates economic growth (A classic vicious circle).
This economic backdrop means the Reserve Bank (RBA) will keep interest rates on hold, perhaps well into 2019. Good for borrowers, but not so good for the A$ IF OTHER COUNTRIES are lifting their interest rates, or suggesting they will.
Whilst this is a somewhat simplistic explanation of why the A$ has fallen (and there are other factors), it is arguably the most signifcant headwind. And this situation appears like it may continue in coming months. Both Malaysia and the Philippines have indicated higher interest rates are coming, as have the US (which has a knock effect for Cambodia and Singapore). So we’d expect the A$ weakness to continue, possibly for the rest of the year.
If your currency exchange needs are modest for the rest of the year, it’s really about keeping a close eye on the FX market. Currencies rarely move in a straight line, there are lots of ebbs and flows, which can create opportunities to convert. Remember the RBA meets the first Tuesday of every month (except January), so you can always expect headlines around this time – and perhaps opportunities to convert the A$.
If you are about to retire or spend an extended period in South East Asia (so your FX needs may be greater), and would like to chat further on managing the risk associated with currency movements (or any other financial matters) please feel free to contact us anytime as per below.
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