Families looking to travel abroad will be pleased with the recent movements of the Australian dollar, but investors and Reserve Bank of Australia board members mightn't be too pleased.
The local currency has roared higher over the last few sessions for a number of reasons. To begin with, expectations that the US Federal Reserve will hike interest rates this month have diminished which is having a negative effect on the US greenback.
Indeed, there has been plenty of speculation over the last month or so that the Fed would use its June decision to raise interest rates, but a reported weakness in jobs growth through May might have delayed those plans. A July or September hike is now reportedly on the cards, but that means lower returns from US bonds for longer, forcing investors to seek higher returns elsewhere.
With Australia's own central bank now looking unlikely to cut interest rates when it meets this afternoon, currency traders are flocking back to the AUD. After all, although our cash rate is stuck at just 1.75%, it is still considerably higher than the rates offered by many other established economies.
The RBA slashed interest rates for the first time in 12 months when it met in May, and there have been plenty of calls for the cash rate to fall even further over the next 12 months – perhaps as low as 1%.
But the board may decide there is no real urgency to cut the cash rate further just yet following a strong rise in recent job advertisements. More jobs is typically a bullish sign for an economy and, given the criticism central banks have copped for being trigger-happy on monetary policy stimulus, the RBA may decide to hold off for a little longer.
As a result of these events, the Australian dollar has roared higher. From around US 72 cents on Wednesday last week, the currency is now fetching US 73.7 cents – a 2.4% rebound. That's great for individuals flying out on international holidays, and could also provide investors with an opportunity to profit if – or when – the currency eventually drops again.
Although the interest rate hike and cut (for the United States and Australia, respectively) may have been delayed, it seems likely that both will happen in the near future, which should push the Australian dollar lower again.
Indeed, as noted by Business Insider, Deutsche Bank's currency team believes the Australian dollar is one of the most overvalued currencies in the world. The RBA has gone on record as well saying it would prefer a lower dollar, with indications that its preferable range would be around US 65 cents — almost 12% below today's level.
A weaker dollar mightn't benefit every company on the ASX (for instance, many retailers rely on a stronger dollar due to their high level of importing), but it is beneficial for companies which generate a lot of their earnings offshore. Cochlear Limited (ASX: COH) is one example, while Westfield Corp Ltd (ASX: WFD) is another.
Of course, it's impossible to predict with any certainty where the currency will trade in the near future, but there are certainly signs that suggest it will go lower in the medium-term. As such, it would be a good idea to consider diversifying your shareholdings to gain some international exposure and potentially profit from a weaker currency over time.
