The Australian Dollar has climbed 5 cents this year to around $0.92 after steadily falling from the dizzy heights of above parity. This prompted talk around the office on what this means for investers and what do people understand above currency fluctuations.
The exchange rate (known also as the Forex rate or foreign-exchange rate) between two currencies is the rate at which one currency can be exchanged for another. For example, at the time of writing this article, $1 Australian dollar (AUD) will buy $0.90 US Dollars (USD).
Over the past decade, the Australian dollar (AUD) has appreciated strongly against the US dollar (USD), rising from less than US $0.50 in 2001 to a peak of over US $1.10 in
2011. It came close to this high again in 2013. While the rise is attributed to a number of factors, the key driver of appreciation over this period is largely attributed to Australia’s mining boom.
Put simply, the higher a nation’s currency the more expensive its goods and services will be for people overseas. So typically a high AUD will impact Australian businesses such as tourism, manufacturers and exporters, because it will be more expensive for people to travel here and the selling price of our goods and services will be higher than previously putting price pressures on business and trade opportunities.
There are a number of factors that impact the Australian Dollar (AUD). Some of these include interest rates movements and the RBA cash rate decisions, inflation, the strength of our economy, our terms of trade and Australia’s level of Government debt.
Shareholders of international shares or international bond funds have foreign-currency exposure. What this means is when a fund manager buys international shares or bonds, they usually buy these shares in the “local market,” or the market where they are issued. This means the manager must buy the security in the local currency, which requires the exchange of AUD into that currency.
The associated risk due to the exchange of currency is called currency risk.
As the value of the dollar is always shifting relative to the value of overseas currencies, a change in the value of the relationship between the AUD and the currency in which the asset or security is purchased can impact the value of the investment. A strong AUD will have a negative impact on the performance of international funds (since the value of the foreign currencies are falling) while a weak AUD will have a positive impact on performance (since the value of the foreign currencies are rising).
It is important that potential and current investors with exposure to foreign currency markets get the right advice about this exposure and implications on investment port folios. For more information, give us a call and make an appointment.