Understanding foreign currency

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Today we’re talking about the AUD plummeting to a two-and-a-half year low – 70.79 US cents (approx. at the time I’m recording this episode)

1. The Aussie dollar could be heading to the “mid to high 60s” by next year, experts say.
2. The dollar is now about 13 per cent below January’s three-year high of 81.36 US cents.

Is it USD rising or AUD crashing?

1. It all depends on what the domestic country is doing in relation to the foreign country of comparison
2. In comparing the AUD to the USD it is the rising USD more so than anything
3. The AUD is going well in relation to the GBP, for example.

The Australian market

1. There is a lack of competition between AU and the US
2. Potentially soft retail sales data due for release could be “another possible nail in the coffin”
3. There is a decreased demand for AUD
4. “The principal reason it’s falling is because the yield spread, basically the difference between interest rates in the US and Australia, has turned very negative,” MacroBusiness Fund chief strategist David Llewellyn-Smith said.
   • The US Federal Reserve last month raised rates – third time this year – now at 2.25 per cent.
   • The Fed has flagged another hike in December, three more next year and one in 2020.
   • RBA cash rate 1.5% since Aug 2016 – No rise since Nov 2010.
   • With the fears of property prices declining – not likely to get a rate rise for a while

Factors affecting currency trade

Carry Trade

1. Global markets work through borrowing in low interest rate areas and invest in high interest rate areas. It’s called the carry trade.
2. It is said that the yield spread on 10-year US and Australian government bonds is now “at the most negative it’s been since 1983”.
3. A lot of people want to sell the Australian dollar at the moment

Terms of Trade

1. The ratio of import to export prices, which in Australia’s case is basically all about coal and iron ore exports
2. We sell so much of both coal and iron ore. There is normally a very strong relationship — high commodity prices means a high Aussie dollar. That’s not the case at the moment.
3. Iron ore and coal prices, while nowhere near their levels during the peak of the China boom, are reasonably high.
   • The AUD would be up around 85 cents based on the terms of trade

Economic & Tariff wars

1. The growing economic war between the US and China.
2. “As we speak, Beijing is employing a whole-of-government approach, using political, economic, and military tools, as well as propaganda, to advance its influence and benefit its interests in the United States,” Mr Pence said.
3. Chinese spies hacked America’s technology supply chain by sneaking compromised chips into companies including Amazon, Apple and big Government agencies
4. It’s about power and strategic ascendancy and hegemony.
5. All that is bad news for Australia — and in this case, the Australian dollar.
6. The worse it gets, the more sentiment sours about the Australian dollar. We’re a little country caught in between two behemoths.

What the current situation is good for

• Cheap to buy Australian goods if you’re overseas

What it is bad for

• Australians buying things internationally

The RBA, for its part, is completely boxed in – are totally unable to raise rates

• Forecasting currency is a mug’s game. There are an impossible number of variables. But those are the primary drivers.

Protecting yourself from currency fluctuations – Investments

1. Hedged vs Unhedged
2. Buying international shares – Hedged at not much risk of currency risks, unhedged is good when AUD is falling
3. Unhedged has been good over the last few years as the AUD has dropped
4. Within an investment portfolio diversify and get both