One of my common complaints about expat life in Australia, and you may hear this a lot from other Americans down under, is how expensive everything is. In this guest post, Peter Lavelle from foreign exchange broker Pure FX takes a look at the Australian dollar and what you may need to know if you’re planning a trip down under.
If you plan to emigrate to Australia in 2013, one of the things that may factor into your decision is the strength of the Australian dollar. After all, a strong Australian dollar means your US dollars go less far when you convert them, making the whole business of emigration more expensive.
Now, as you may know, the Australian dollar has been above parity with the US dollar for most of 2012, which is way above the historical average. Given that, will it weaken in 2013, making your emigration to Australia better value? In this post, I want to look at the arguments for that happening.
What might cause the Aussie to fall?
Lower interest rates from the Reserve Bank
Arguably the biggest reason why the Australian dollar may fall in 2013 is if the Reserve Bank of Australia cuts interest rates. Why might it do that? Well, because in the last decade, Australia’s economic growth has come from its mining boom, but that’s set to peak next year. To make sure Australia’s economy doesn’t run out of steam, the RBA might therefore cut rates to make borrowing cheaper, and hence encourage more people to take out mortgages, and more businesses to invest.
However, that would see the Australian dollar weaken because, if you’re an investor, then high interest rates deliver higher returns for you. With lower interest rates, Australian investments are therefore less attractive. That means there’s less demand for the Australian dollar (if you want to invest in Australian assets, you have to do it in Australian dollars) which causes the currency to weaken. Hence, when you exchange currencies to buy Australian dollars, you get more of them.
The United States going over the fiscal cliff
Second, the Australian dollar could also weaken in 2013 if the United States falls off its ‘fiscal cliff.’ In case you’re not familiar with the term, the fiscal cliff is $600bn in automatic spending cuts and tax rises, due to come into force on Jan 1st 2013, unless political leaders can agree a solution. The cliff is steep enough that it could single-handedly plunge the US into recession. Hence, much depends on President Obama and House Speaker John Boehmer putting aside their differences in the next month.
The fiscal cliff would cause the Australian dollar to weaken meanwhile, because it would affect not just the US economy, but Australia too. Imagine for instance, that you’re an Australian business owner, who ships machine parts to the US. If the US economy (i.e. your customer base) is set to shrink, would you be inclined to invest in new equipment, or hire more staff? Probably not, because it’s too big a risk. Given that, as Australia’s own economic prospects fade as a result of the cliff, the Australian dollar could weaken too.
One thing to keep in mind!
I think there’s therefore a pretty good chance of the Australian dollar weakening in 2013. However, it’s worth bearing in mind that, just because it’s possible, or even probable, does not mean it’s guaranteed to happen! The foreign exchange market is a fickle thing, with the potential for the Australian dollar to keep climbing against the odds. Keep that in mind!