What’s going on with the dollar?

The Australian Dollar has been in the news quite a bit lately, and it has a few people concerned about the impact on the economy. In the past couple of months, the dollar has fallen from as high as $1.05 vs. the USD, to the USD $0.94 range, a drop of some 10%.

Despite this recent fall, the AUD is still very high in historical terms. Ten years ago the AUD $1 bought only USD $0.60.

The strength of the AUD this past decade has been driven by three factors

• A stronger economic performance here relative to the rest of the world 
• Higher relative interest rates in Australia 
• The mining boom due to the growth of China, which led to increases in the prices of iron ore and coal (our major exports)

We are now witnessing a reverse of these three factors, and there are indicators that this will continue.

What’s happening in the economy…

In terms of interest rates, the Reserve Bank has cut rates to record lows domestically, which narrows the gap between Australian rates and the rest of the world, as those rates are close to or at zero.

The mining boom has slowed, with large reductions in planned capital expenditure being announced by all the major players.  There has also been a fall in the prices of our key exports from the sector.

The global economy has been holding fairly steady while the Australian economy has weakened, with many economists believing it is now our turn to slow, after a fairly soft landing post GFC (in comparison to other global economies).

This has led markets to expect much lower interest rates in Australia, sparking a sell off in the currency.

How does this affect individuals?

With the possibility of increased import prices due to the falling Aussie dollar and inflation, cash flow management will become a real issue with many Australians. Take petrol for example- the falling Australian dollar, according to a report issued by Commonwealth Bank, has added 12.5 cents per litre to the cost of petrol in the last couple of months.For those of us with mortgages, an increase in daily living expenses could push weekly budgets to the limit.

Despite what could be difficult times ahead, there are always opportunities in the market to take advantage of. With interest rates at record lows, now is the perfect time to review your mortgage and refinance if appropriate to your situation. A reduction in your repayments could significantly free up cash flow to alleviate the effects of increased living costs.

Be sure to consider the effects of refinancing on your personal circumstances before acting and talk to a non-aligned financial adviser to ensure you receive the best rates available in the marketplace. For more information on reviewing your mortgage, click here for our previous blog by adviser Duncan Brown.


Lynley Hukins