The fall in the value of the Australian dollar is playing havoc with the cost of overseas holidays and the buying of imported goods. But what does it mean for YOUR money?
Back in 2011 the Australian dollar was at parity with the US dollar … a dollar for a dollar. Now it’s hovering around its lowest levels in years – decades even. If you’re an investor, this could have very real implications for your portfolio.
The Aussie is compared most often against the US dollar which is regarded as the “world’s trading currency”. The Greenback is usually the common payment currency in trade between different countries.
If the US dollar goes up in value, the Aussie will fall in value by comparison even though
nothing economic or financial may have happened here.
So what does a weaker currency really mean for your money?
How a low Aussie dollar could impact your shares
A weaker Australian dollar isn’t necessarily all doom and gloom for the local share market. In fact, some companies actually benefit when the dollar drops.
Take businesses that export goods – think mining giants like BHP and Rio Tinto, as well as agricultural producers. They get paid in foreign currencies like the US dollar, so when they convert those earnings back into Aussie dollars, they end up with more in their pockets.
Take the gold price which at US $2,820 is up 773 per cent in the last year and at record
highs. For an Australian gold miner that converts to $4,549 and, because the Australian
dollar has fallen so much, is up 1,371 per cent in the last year.
That’s why commodity-driven sectors are big beneficiaries and tend to experience a bit of a surge when the dollar falls.
On the flip side, businesses that rely heavily on imports (like retailers that buy in stock from overseas) get walloped with higher costs – think of those that are operating in manufacturing and technology, and even airlines that pay for fuel in US dollars.
It’s a mixed bag for investors too. If your portfolio has strong exposure to exporters, you
could see some serious gains. But if you're invested in companies that depend on imports, I reckon you need to be keeping a very close eye on how their profits could be impacted.
What it means for your international investments
Here’s where a weaker Aussie dollar can really work in your favour. If you’ve got
investments in global markets, a falling local currency actually boosts your returns when their returns and values are converted back into AU dollars.
Let’s say you invested in a US stock like Apple when the exchange rate was US 70 cents
per AU $1. Now that the dollar has fallen closer to US 60 cents, the value of that investment has increased in Aussie dollar terms – even if the stock price hasn’t moved.
This is why lots of investors hold international shares as a hedge against currency fluctuations. If you’ve already got exposure to overseas markets, you’re likely benefiting from the weaker dollar.
But just be conscious, that if the Aussie dollar starts to improve its value, then the opposite occurs. That’s why a lot of investors will hedge their overseas investments to take away the currency risk – both good and bad.
How does it impact property?
You might not think the exchange rate has much to do with real estate, but a weaker dollar can have some surprising knock-on effects for the housing market.
For starters, foreign investors tend to see Australian property as a more attractive
investment when the dollar is low. A cheaper Aussie dollar means overseas buyers get more bang for their currency buck. The result? Increased demand, especially in Sydney and Melbourne where international investors are already very active.
On the downside, building costs can rise when the Aussie dollar is weak. Plenty of
construction materials and appliances are imported here, meaning property developers and renovators could be stung with higher prices.
Don’t forget about your super
Your super fund is probably invested across a mix of local and international assets. Most
super funds hold unhedged international investments, meaning any currency fluctuations will impact your returns. When the dollar drops, the value of these investments goes up in Aussie dollar terms. That’s why you might notice stronger performance in your super fund’s international shares when the dollar is weak.
But the impact will ultimately depend on how your super fund is structured. If you’re not sure, It’s worth checking your fund’s investment breakdown or speaking with your super provider.
The best ways to manage currency risk
So how can you protect your investments from excessive currency risk?
- Diversify your portfolio: I’ve said it before and I’ll keep saying it until I’m blue in the face. Holding a mix of Australian and international investments spreads out your risk. That way, when the dollar weakens, your overseas holdings can help balance out any local losses.
- Look into currency-hedged investments: Some international ETFs and managed
funds have hedged options, which will give you a bit more protection against
currency fluctuations. Just remember that while it can help keep volatility to a
minimum, it can also limit your gains when the Aussie dollar is weak. - Think long-term: Trying to time currency movements is next to impossible – even
the experts get it wrong. If you’re investing for the long haul, focus on quality assets rather than short-term movements to the exchange rate.
There will always be winners and losers from a low Aussie dollar. The trick is not to panic about short-term currency moves. I think that if you keep an eye on these things and take the approach that this is all about the long term – not just the next few months and years – then you’ll be in a decent position to ride out any potential fluctuations and keep your investments on track.
