Australian Economy

The Australian dollar is showing some strength, and that could be good news for travellers

For a relatively small, open economy, Australia’s currency is heavily traded. In fact, it’s on the podium for one of the world’s most traded.

So it’s known to be pushed and pulled on global currency markets on a daily basis.

Curiously though, the Australian dollar has hovered around 66 US cents or above for well over a month now. Recently it even pushed to a six-month high, trading as high as 67.8 US cents.

It’s a subtle push, but it’s meaningful.

Let’s explore why.

Strong commodities, strong dollar

The Australian dollar is known as a commodities currency. This means that if someone offshore wants to buy copper, coal or iron ore from the nation’s miners, they need to buy Australian dollars to do it.

Demand for all of these commodities has been resilient in recent months — particularly iron ore. Treasury’s forecasts assume a price of $US60/tonne but it pushed up towards $US120/tonne earlier this year and it’s now close to $US110/tonne.

There were fears China’s property market collapse would wipe out demand for iron ore but instead, it’s held up — particularly thanks to the CCP’s economic stimulus measures.

In short, demand for Australia’s commodities has held up, and therefore so has the dollar.

High interest rates, high investment

The second driver of the Australian dollar is critical right now — it’s the difference between interest rates in Australia and other parts of the world.

Australia’s central bank — the Reserve Bank — was relatively late to tighten monetary policy and it seems it will be a similar story on the path to easing policy.

While other central banks, including the US Federal Reserve, have clearly signalled their intentions to cut interest rates, the Reserve Bank is not yet in a position to do so.

This is because various measures of inflation, including the trimmed mean, are still above the Reserve Bank’s target band of between 2 and 3 per cent.

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While the price increases of many goods are falling, and some are being discounted, the cost of services — including rent — remain elevated.

The latest National Australia Bank business survey shows some promise of costs falling for businesses, which would be promising as far as the outlook for inflation is concerned.

However, the bank says the data is still too bumpy to make a definitive call on whether inflation is easing.

“Price pressures continue to ease in a trend sense though the data certainly remains bumpy,” NAB head of Australian economics Gareth Spense noted.

It might sound a little esoteric but it’s a crucial point.

Escalators at Carindale shopping centre busy with Christmas shoppers

While the price increases of many goods are falling, and some are being discounted, the cost of services remains elevated.(ABC News: Curtis Rodda)

There’s little confidence Australia’s battle with inflation has been won.

It means there remains the “possibility”, as many economists have put it, that the Reserve Bank will be forced to raise interest rates either next month or later in the year.

At the very least, the Reserve Bank is unlikely to cut its cash rate target until November.

At the same time, for example, there’s growing expectation the US Federal Reserve may decide to cut its Federal Funds Rate as early as September.

This would make Australia a relatively attractive place for international investors — who are comparing the return (or interest rate) they can earn on their money in the US versus Australia — to park their cash.

A country’s relatively higher interest rates act like a magnet for money flows, and as investors chase those interest rates they demand the relevant currencies.

In short, because Australia’s interest rates are expected to remain relatively high, demand for its currency is strong.

“It is probable the Australian dollar will [be] slightly stronger over the next six months,” independent analyst Evan Lucas says.

“We have the possibility of interest rates [in Australia] going higher still.”

BetaShares chief economist David Bassanese sees the dollar above 70 US cents into next year.

“So I’ve been anticipating the Aussie [dollar] to break above the 70 cents [mark against the US dollar] over the next 6 to 12 months on the view the US will cut interest rates more aggressively than we will be able to,” he said.

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Could now be a good time to travel?

Having a stronger currency helps keep a lid on domestic inflation by giving consumers more import purchasing power.

Crucially, for those with itchy feet, it also opens up some travel opportunities.

Now, let’s not get carried away; it’s not suddenly making an overseas holiday cheaper but, equally, it’s not making it more expensive.

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Take Japan, for example. The Australian dollar is buying 108.5 yen — the highest rate in 30 years.

“It’s the cheapest Australians have been able to go to Japan,” independent analyst Evan Lucas

And if Europe’s more your style, one Australian dollar is now buying roughly 63.5 eurocents.

That’s above the historical average of the past two years.

With the Australian dollar buying 67.4 US cents, it’s a better time to travel to the United States than earlier in the year.

And if analysts like Evan Lucas are correct, the Australian dollar’s value is still set to increase slightly.

This may, perhaps, give those travellers who haven’t yet made up their mind on whether to jetset some extra time.

The stronger Australian dollar highlights the nation’s ongoing cost-of-living battle and China’s economic resilience.

But it’s also providing some no doubt welcome financial support to a nation of travellers.

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