Since the RBA cut the cash rate to a historic low of 1.75% this month, the Australian dollar has begun to fall in value against the US dollar.
In fact, the rising value of our currency was a big reason that a rate cut was coming, with Macquarie Bank predicting it would rise to 80 cents against the US dollar.
Wait a minute… Isn’t a strong Aussie dollar something we want? Well, it depends on the circumstances, and maybe a little bit on who you are.
Before we dive in, it’s a good idea to know what makes currency values fluctuate. Don’t worry, we got you covered.
Right now, our economy is undergoing a pretty massive shift away from mining towards innovation, dubbed “the ideas boom.” Considering the delicate nature of this change, we want to attract as much international business and investment as possible, and nothing attracts customers quite like a good bargain!
To use a very simple example, let’s say that Australia exports really, really great potatoes for $100 a kilo. The US freaking love our potatoes, so they are a regular importer and at the time, the exchange rate is $AU1 for $US1. Easy. The US gobble as many delicious, ground dwelling taters that they can get their Donald Trump loving hands on.
But then the Australian dollar takes a little punch in the face and drops to a value of $US0.90. The US are stoked, because now they can import our incredible potatoes at a lower price. Nice!
Being able to import our goods or services for a lower price increases the international competitiveness of our stuff, which will usually result in a higher output of stock, translating to higher revenues.
The downside? Imports will cost us more, particularly for the consumer. Let’s take the Oculus Rift VR headset for example. This little jewel of modern technology costs $599 US. Converting that at the current exchange rate, we pay $790.13. I used the Westpac currency converter, as banks will offer a slightly lower rate than what is broadcasted (known as the interbank rate).
That’s almost $200 extra, and I haven’t even factored in international postage.
Of course, this is just a big fat first world problem in the bigger scheme of things. I’d argue that a thriving economy is more important than cheap consumer electronics, but that’s just me.
So why have we always cheered for the dollar as it gained traction against its international counterparts? It could be that we just love getting behind the underdog, says Business Insider’s Greg McKenna.
“For years when I was working in wholesale financial markets as a fund manager and strategist, the AUDUSD was often casually called the “Aussie Battler” because it never seemed to be able to hang onto its gains. Whenever it seems to rally, there was always something around the corner which knocked it off its perch and pushed it lower.”
Moving forward, he proposes that we stop comparing the AU dollar to the US, and start looking at it from a US perspective.
“Tourism, education, and business services have all picked up as the Australian dollar has weakened. That, along with construction and a lift in household consumption, is what’s driving Australia’s economic transition.”
Sure, you’re going to have to shell out a little more for travel and imported goods, but at the end of the day, we need this economic transition to work, because if it doesn’t, we’ll be well up shit creek and our paddle will not be easily retrievable.