Unpacking the dollar - How the falling AUD may affect more than just your planned overseas trip
Keeping an eye on the value of the Australian dollar has always been a sensible approach for travellers and it’s something investors should also keep sight of too.
Anyone who invests in international assets, from shares to commodities, is exposed to foreign currencies, and feels the impact of how these are valued against the Australian dollar and against other assets. This can add or remove value from your portfolio depending on market activity.
The value of a dollar
The Australian dollar can be influenced by a number of factors:
- Inflation
- Commodity price levels
- Financial market sentiment
- Volatility in asset markets
- Global investment flows
- Movements in interest rates
- Speculator positioning
All these factors work together to determine a price for the Australian dollar, which fluctuates against other world currencies.
High or low
Australia’s economy typically benefits from a lower Australian dollar compared to the US dollar (though online shoppers may dispute this). A lower Australian dollar assists in supporting our export markets as countries can purchase more for a lower cost, and can offer a welcome boost to tourism as a traveller’s coin extends further.
While the Australian dollar rose over the latter part of the global financial crisis, it has started to return to lower levels. This is welcomed, and supported, by the Reserve Bank of Australia.
But while it may be positive on the whole for the state of the economy, the sentiment may not be same for investors in overseas assets.
Currency and the value of international investments
When making overseas investments, you can take two approaches.
- Invest wholly into the investment, for example, 100% into international shares.
- Invest into a hedged investment which means that a portion of your investment is allocated specifically to manage the risks that the currency of the investment decreases against your own currency.
Investors generally select an option based on their view of whether the Australian dollar is likely to increase or decrease.
For example, if you think the Australian dollar is going to decrease, you may choose the first option, to be completely invested. This would mean that, assuming consistency in value of other global currencies, if you redeemed your investment you would hope to gain extra value from the currency conversion, aside from any growth in the investment.
On the other hand, if you thought the Australian dollar was going to increase, you may choose the second option. This would mean you are seeking to minimise value loss from the currency conversion.
Which option is correct is not necessarily as simple as the direction of the Australian dollar given its relationship with other global currencies. Currency fluctuations can be short or long term depending on market activity and the domestic situation of a country. The constant changes mean it can be difficult to manage currency in your investments and having expert advice or investment managers can be invaluable.
Combining approaches for the best of both worlds
Some investors use both approaches in their investment portfolios. This means they might receive extra returns from currency conversion as well as helping to reduce losses if the currency goes in the other direction.
It’s worth talking to us about how currencies impact your portfolio, so give us a call today, we’re here to help.
