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The little Aussie battler that could

With the u9 and u11 Hockey seasons coming to an end I almost have my Saturday's back, but for how long, who knows!  Having said that, with the mild winter we've had this year, it's been quite enjoyable to get outside and watch the kids in action.  I'm always amazed at the level of skill on display from such young kids.  

I had been planning to give the Ekka (the Brisbane show for those that live outside of Sth East QLD) a miss (again) this year, but Jasmine's dance group is performing (on the busiest day too!), so of course I'll now be there to watch.  I am planning on giving both kids a budget for their 'fun' money (ie show bags and rides), and just like I hope to avoid the dreaded Ekka flu, I hope to avoid giving in to puppy dog eyes and calls of I Love You Dad as they seek to unlock access to my wallet after running out of their money.  I try not to make predictions, but I'm pretty sure I can predict what's going to happen at the Ekka.

The Australian Dollar, the little Aussie Battler, whatever you call it, it's certainly been rocketing up in recent weeks against the United States Dollar (USD).  If you're to believe the commentary from the various breakfast TV shows, we should be loving that the little Aussie battler is doing so well, in fact, we should be cheering it up to parity and beyond.  If you buy lots of goods from overseas, or you're travelling overseas, then yes, a higher Aussie Dollar is good.  However, as an investor, and living in an export led economy, we should be hoping that the Aussie Dollar starts to fall soon.

As many international contracts are priced in USD, a low AUD means that our exporters (farmers, mining companies etc) are getting more bang for their buck.  In addition, investments that are also priced in USD increase in value for Australian investors when the AUD falls (see following for my simple example).  The high AUD v the USD has been one of the reasons why Australian investors have not received the full benefit from the recent rise in the US share market. 

Example 1:

- An Australian farmer sells 1000kg of beef and is paid USD $2.11 per kg.

- If the AUD is worth $0.792 USD, the farmer will receive $2,663 (1000 x 2.11 / .792);

- If the AUD appreciates against the dollar and is trading at parity (AUD $1 = USD $1) however, the farmer would now only receive $2,110;

- If, however, the AUD falls and is worth $0.65 USD, the farmer would receive $3,246 (1000 x 2.11 / .65)

Example 2:

- An international share fund that Australian investors use has a unit price of USD $1.25.  An investor owns 5000 units in the fund.

- If the AUD is worth $0.792 USD, the investment will be worth $7,891 (5000 x 1.25 / .792) for an Australian investor;

- If the AUD appreciates against the dollar and is now trading at parity (AUD $1 = USD $1) the value of the investment will fall to $6,250 (5000 x 1.25 / 1);

- If, however, the AUD falls and is worth $0.65 USD, the investment would now be worth $9,615 (5000 x 1.25 / .65).

As you can see, there is a currency impact in both examples, and changes in the exchange rate can have significant impacts on the value of investments and the value of exports.  

Predicting currency movements is neigh on impossible as so many factors have an influence.  The best strategy is to remain diversified and have quality assets underpinning portfolios.  

I recall a presentation I attended some years ago held by former BT Chief Economist Chris Caton.  During this presentation he was talking about how he received an award based on his prediction for where the AUD would be in 12 months' time.  He said that he didn't put any thought into his prediction, he pretty much just picked a number, and gave it no further thought.  While perhaps he did actually think about it a little more than that, the point he was making, and has made a few time since then, is that anyone who says they can predict what the currency is going to do, can't.  We can have some idea based on interest rates etc about what should happen, but there's always another variable (eg domestic/international politics (etc)) that can throw the proverbial spanner in the works.

Speaking of international politics, markets haven't really reacted to the on-going verbal stoush between the USA and North Korea, but that will change if the war of words turns into a shooting war.  Whatever happens, hopefully there won't be a nuclear 'solution'.

If you have any questions, please do not hesitate to contact me.