Most of us only bother to think about the exchange rate when we’re about to go overseas but there are other reasons to keep a closer eye on what’s happening to the dollar. Here’s the YMM Top 5.
It signals what’s happening to our economy
The value of the Australian dollar against other key currencies, especially the US, Japanese Yen and the Euro, can give you insight into what’s going to happen to interest rates, employment, retail sales and a whole range of other indicators of Australia’s economic strength or weakness.
Understanding our economy can help you to better manage your finances, savings, levels of debt, super and other investments.
The Aussie dollar is considered to be a “risk currency”. That means when things are going well in the world its value increases against other currencies because good global economic news means investors around the world feel more comfortable taking more risk.
As a result, their demand for our commodities (minerals and metals) increases and they need Australian dollars to pay for those resources.
IG Markets analyst Stan Shamu says that’s why the Australian dollar has weakened against the US in recent days (down from $1.082 to just below $1.07 and could trend down to $1.05).
“We’ve seen the Aussie dollar struggle this week with the whole Greece factor,” says Shamu.
Greece’s refusal to guarantee it will put austerity measures in place to secure its latest rescue package from Euro finance ministers has been a big factor in seeing the dollar go lower.
“The Euro situation has reached a very critical point which is why we are seeing caution from investors. There is scepticism that Greece can pass through the needed austerity measures and we’ve reached the eye of the storm so if it looks like the Euro is in danger we will see the US dollar and the Yen get stronger,” he says.
It flags what will happen next with interest rates
One of the main reasons why the Aussie dollar has continued to be so strong since the beginning of the year has been our relatively high interest rates (when compared with other major economies, including the US which has an official rate of 0%).
One of the reasons why the dollar has fallen this week is that the big banks decided to increase their home loan interest rates out of step with the Reserve Bank’s decision to keep the official cash rate steady.
Stan Shamu says this has increased certainty that the RBA will cut rates at its March meeting. It will need to adjust rates to ensure that most household repayments are kept within its desired range so it can maintain control of the general direction Australia’s economy is moving in.
It can teach you about consumer sentiment and employment prospects
The other two main economic indicators that influence the value of the dollar are overall consumer demand and unemployment. Currently Australian consumer sentiment is weak and so s the jobs market. Those factors reflect generally negative economic sentiment that can force interest rates lower. Investors therefore price our dollar lower against other major currencies.
It can help you to manage your own finances
The direction that the dollar takes can help you to make decisions that can improve your own financial well-being. For instance, if you are considering refinancing, it may be worth putting your plans on hold for a month or two until the current interest rate environment settles down.
Likewise if you have money that you want to invest in cash such as a term deposit, it may be worth locking in an attractive rate now in case it’s not on offer in a few months.
If you know what’s happening in the broader economy you can keep your own finances ahead of the pack.
It is an investment opportunity
More and more retail investors, who have money they can afford to take pretty high risks with, are turning to foreign exchange investing as a way to diversify their portfolios out of traditional asset classes such as shares, property and fixed income.
Forex trading involves taking a view on how you think one currency is going to perform in relation to another. If, for example, you think the Aussie dollar is going to keep going down in relation to the US, you may decide to go short on the Aussie. That means you can actually make a profit from the currency’s relative weakness.
The number of brokers offering either spot or CFD forex trading to Australian investors is increasing to meet the growing demand.
The best way to find out if forex is right for you is to set up a practice account and spend a couple of months finding out whether or not you’re good at determining foreign exchange trends.
Also look for a broker (such as eToro) that doesn’t enable you to lose more money than you put into your account. And only ever trade forex with money you can afford to lose.