The Australian Dollar has been on the decline for the majority of 2023 and in recent times it has weakened heavily against the US Dollar. After beginning the year at 0.68 USD, it reached a high of 0.72 USD in late January and is now hovering between 0.64 - 0.66 USD.
Despite recent weakness, NAB is predicting the Australian Dollar will get stronger towards the end of 2023. They are forecasting the AUD/USD exchange rate will be $0.73 by December 2023 and will climb to $0.77 by June 2024. Westpac is also optimistic about the AUD and believes it will be worth $0.74 by June 2024. Commonwealth Bank economists are forecasting that AUD's recovery will take longer than expected and will reach $0.68 in June 2024.
The Federal Reserve in the US has hiked interest rates at a much faster pace and rates now stand at 5.1%. In comparison, the RBA raised the cash rate to 4.1% and are hesitant to raise rates further as the economy slows. Fed chairman Jerome Powell has indicated at a speech in Jackson Hole that he's willing to raise interest rates higher to tackle sticky inflation. It's unlikely the Australian Dollar will make any meaningful recovery until the US lowers interest rates or China stimulates their economy.
According to Michael Yardney, the American economy can cope better with higher interest rates because the majority of fixed-rate mortgages come with longer terms of 10, 20 and 30 years. Whereas Australia's fixed-rate mortgages are much shorter - 1 to 5 years.
If the AUD is going to drop against the USD you might try saving money by either:
- Sending money now rather than waiting for better rates
- Using a forward contract to lock in the current exchange rate for a future transfer
But if AUD is going to rise against the USD you might try saving money by either:
- Sending money later rather than now, in the expectation of better rates at a later date
- Using a limit order to set up a transfer in the future that will automatically execute at the specified rate
Finder survey: Are Australians of different ages worried about a weak Australian dollar?
Source: Finder survey by Pure Profile of 1110 Australians, December 2023
There are a lot of factors affecting currency forecasts and even experienced forex traders can struggle to predict movements. One of the starting points is looking at purchasing power for a sense of how much a currency is really worth, and therefore whether it’s over or undervalued.
Purchasing power refers to how much you can get for your money with the local currency in different countries. Purchasing power parity is how this differs between countries. It's often used as a starting point for valuing currencies because purchasing power is sometimes seen as the "true value" of a currency.
For example, if a basket of common household goods costs $100 in Australia, and an equivalent basket costs US$50 in the United States, then AUD$1 should theoretically be worth USD$2. If it's not, you can look at whether it's overvalued or undervalued as a starting point for your own currency forecast.
Interest rates are set by a country's central bank and refer to how much interest is paid on loaned money.
These interest rate changes affect inflation, consumer behaviour and international investment in a country, and other factors which all come together to change currency prices.
By itself:
- Raising interest rates generally leads to a stronger currency, as it attracts more foreign investment and demand for a country's currency.
- Lowering interest rates generally weakens a currency, as does the opposite, and reduces foreign investment.
Other factors to consider include:
- International trade. If a country exports more than it imports, the high demand for their goods is positive for its currency.
- National debt and growth. Lower national debt and more growth bolsters confidence in a country's economic future and attracts more foreign investment.
- Policy changes. Policy changes such as lowering interest rates or borrowing too much money affect a currency's value.
- Other markets. The value of a currency can be affected by other markets. For example, a booming stock market may take money from forex investments.
- Speculation. Speculative currency trading can have a stabilising and destabilising impact on exchange rates.
There are a lot of factors which determine the value of a currency, and in the short run there tends to be a lot of cyclical ups and downs. But no matter which way it's going, it's always worth getting the best rates possible.
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