The Australian Dollar (AUD) during the Covid-19 crisis has hit levels not seen in over 17 years, so where do we expect it to head next..?
And importantly, what does this mean for Australian expats in Singapore and across the globe in terms of shifting money back into our home currency.
What’s happened so far?
The Australian Dollar (AUD) has reached record lows against the Singapore dollar, hitting $1.248 in the last fortnight before tracing back to $1.15. This is reflected in the chart below:
Personally, I moved to Singapore in mid-2013, and it’s hard to believe given the current environment, that the Singapore Dollar (SGD) bought just A$0.76 back then. The 10 year chart is reflected below to highlight just how much the Singapore Dollar has strengthened against the Australian Dollar:
What drives the Australian Dollar?
The Australian Dollar is largely a commodity-based currency, and is influenced by four key factors, which I’ve outlined below:
- Interest Rate Differential: Up until just recently, Australia had a cash rate that was much higher than many other developed countries. This led to what is commonly referred to as the ‘carry trade’, whereby foreign residents shifted cash to Australia to obtain a higher interest rate on their cash savings. Now that the cash rate in Australia is 0.25%, we can safely assume that the ‘carry trade’ is no longer an attractive option for investors, and we don’t expect that this will change in the short term.
- Inflation: Higher rates of inflation will typically lead to an appreciation of the currency. This is largely due to the fact that higher rates of inflation will lead the Central Bank of that country, in this case the Reserve Bank of Australia (RBA), to increase interest rates which can lead to higher demand for the currency. This is reflected by the ‘carry trade’ that was a popular strategy for investors when interest rates in Australia were much higher. We do not expect to see inflation rising in the near-term in Australia.
- Government Credit Rating: The credit rating of a particular country, issued by the global ratings agencies, reflects the inherent risk of lending money to that particular country. The Australian credit rating is currently AAA, which is the highest rating available, and reflects the low risk level of lending money to the Australian Government, meaning that it is extremely unlikely that investors would not be repaid their capital. If Australia was to lose its AAA credit rating, this may lead to a lower level of demand for Australian Government bonds and a depreciation in the currency.
- Commodity Prices: The three currencies with the highest correlation to commodity prices are commonly the Australian Dollar (AUD), New Zealand Dollar (NZD) and the Canadian Dollar (CAD). The Australian Dollar’s tight correlation with both gold and iron ore in particular means that when the price of these commodities increases, the exchange rate tends to increase along with it. Given the current perception that China has the virus under control and is re-opening for business, we may continue to see some strength in demand for iron ore, as reflected in the price of the commodity. If this were to reverse, then we may see further weakness in the Australian Dollar.
Where to next?
We do not expect to see much more downside in the Australian Dollar (AUD) from these current levels. The Monetary Authority of Singapore (MAS) has announced that they would cap the growth of the Singapore Dollar (SGD) at 0% going forward to shelter the economy from the expected recession, which we believe translates to the current FX rates to hold a tight band going forward. While we may have short-term spikes above A$1.20 to the SGD, we don’t believe that they would be long-term.
We expect to see a similar outcome against the US Dollar (USD), trading in a band between US$0.55 and US$0.60 going forward. This will also depend on the level of fiscal stimulus provided by each country globally to defend their respective economies and populations against the spread of Covid-19. While the United States has the benefit of being the reserve currency, other countries do not, so we will be closely monitoring Government debt levels going forward.
What should I consider as an Australian expat?
If you’re planning to work or retire in Australia in the short, medium or long-term, then you may want to consider the opportunity that is currently presenting itself to you and shift some of your funds or investments into Australian Dollars (AUD). It’s always important to seek professional advice here and consider your options, also ensuring that it does not have any adverse tax consequences for you as an expat.
To Your Financial Success!
Jarrad Brown is an Australian-trained and qualified Fee-Based Financial Planner with Australian Expatriate Group of Global Financial Consultants Pte Ltd providing specialist financial advice and portfolio management services to Australian professionals in Singapore. Jarrad Brown is an Authorised Representative of Global Financial Consultants Pte Ltd – No: 200305462G | MAS License No: FA100035-3
Australian Expatriate Group is a division of Global Financial Consultants in Singapore providing specialist advice to Australians living abroad.
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General Information Only: The information on this site is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision.
*Please note that Jarrad Brown is not a tax agent or accountant and none of the content outlined here should be taken as personal advice. You should consult your tax agent and financial adviser to review your current personal finances and financial goals to consider whether this strategy is appropriate for you.