Westpac has cut their 2015 forecast for the Australian Dollar. They now expect that the Aussie Dollar will end 2015 at USD 0.66 rather than USD 0.70. Confidence in the Australian Dollar and the Australian economy is falling. The reasons for the falling confidence are:
- Deteriorating Terms of Trade - The value of Australian imports exceeds the value of Australian exports. This means that money is flowing out of the Australian economy. This will cause the value of the currency to depreciate on the foreign exchange markets. We expect that the AUD/USD exchange rate will continue to show volatility but the overall direction will be downward
- China is Slowing - Economic growth in China is slowing. China slowing is bad for the Australian Dollar. China represents a significant share of the global market for iron ore and copper ore. During the resources boom, they were our best customer. A slow down in China means a drop in sales for our exporters, which in turn hurts the Australian Dollar.
How Does a Lower Dollar Affect Us?
A falling Australian Dollar will mean that anything we purchase using foreign currencies will become more expensive. This can lead to increased prices through the entire economy in what is known as imported inflation. Australian exporters will benefit from a cheaper dollar. Their goods which are priced in Australian dollars will become more competitive for their international customers .
International travel will become more expensive. As the Australian Dollar falls, the price of taking an overseas holiday will rise. This might make travelling inside Australia a better option. A cheaper dollar also makes Australia a cheaper destination for overseas tourists. We have already seen tourism replace Iron Ore as Australia's biggest export.
There are ways to hedge against the falling Australian Dollar. One simple way, is to bring forward any international spending you are planning. For example, you might want to buy that new car or tv before the falling dollar drives those prices up.
Another way to hedge is to speculate on the foreign exchange market. This carries a lot more financial risk, as it is possible incur serious financial losses. One way is through Contracts for Difference, which allow you to speculate with as little as $25 of your own funds. We have experimented with Plus500 , and found their platform very easy to use. There is also a demo mode so you can test your trading skills without using real funds.