Oi…Get Your Hands off My ‘Stubbornly High’ Aussie Dollar!

If you’re like me, maybe you still prefer the archaic convenience and anonymity of cash.

There’s something about counting out a stack of bills to pay for your groceries that drives home the true cost of your weekly grub. Forking out over $200 in notes to the cashier simply hurts more than flapping your credit card over some paywave reader.

And — unless you get talked into handing over your bonus rewards card — no one knows how much you spent on junk food, cigarettes, or booze. Not the in-store marketers. Not the NSA. And, importantly, not your health insurance company.

Of course not everyone likes carrying around enough cash to pay for their daily expenses. Maybe you prefer debit or credit cards. Or maybe you’ve already boldly embraced what I’m told is the future, and your wallet has gone digital.

Like Sam Volkering, our resident technology sage for Revolutionary Tech Investor. According to Sam, if you can’t purchase something with your smartphone, it’s probably not worth buying.

Sam also dabbles in bitcoins, and other cryptocurrencies;. The idea is that these virtual currencies are supposed to be anonymous and break governments’ monopoly on money. It’s a nice idea, in theory.

Unfortunately the reality is lagging well behind the theory. The value of virtual currencies can vary wildly from day to day. The level of anonymity is questionable. And, when all is said and done, your bitcoins are swapped out for conventional cash. This brings government right back into the game.

Even if you resort to barter, the goods you trade for services — or other goods — will invariably be judged by their dollar value.

At the end of the day, in whatever form you prefer, you’re really stuck with cash.

And every single government in every nation with a floating currency — one that’s not pegged to the value of another currency — works behind the scenes to manipulate the value of that money. Jawboning by national reserve banks. Engineering interest rates. Money printing. These are just some of the tools at their disposal.

In recent years most governments have been trying to devalue their currencies.

Australia is no exception. There has been no lack of jawboning from Reserve Bank of Australia governor Glenn Stevens to try and drive the Aussie down.

But despite his rhetoric and RBA interest rates at historically low levels of 2.5%, the Aussie dollar has refused to bend to the government’s will. While this week it fell a few cents against the US greenback, it remains ‘stubbornly high’.

Why? Partly because interest rates in other developed nations are even lower, meaning the Aussie offers better cash returns than the euro or US dollar. But it’s also because investors see Australia as a strong, secure place to invest.

None of that is a bad thing. Yet you’ve been conditioned to believe that the Aussie needs to drop another 10% or more. This will help drive our exports — think iron ore — bring in a flood of international visitors and students, and fuel our economy to new heights.

And there will be hardly any negative consequences. Unless you plan to travel overseas yourself, or your business is dependent on imports. But the benefits will far outweigh the harms. Right?

I’m not so sure. Now, I’m not saying that a falling Aussie dollar is all bad. But I am saying that it is far from all good. And that for you, as a hard working or perhaps retired Australian, it may well cause more harm than good.

In today’s interconnected world of global trade, it’s not just imported goods and overseas vacations that will get more expensive if the Aussie loses value. The price of a lot of domestically produced items will go up too. This includes locally mined gas which is sold to you at international pricing levels. It includes your milk and beef. The cost of heating your home and running your car. And of course pretty much everything that is imported.

Speaking of homes, a lower Australian dollar will almost certainly fuel the spiking cost of property. Why? Among other reasons because Aussie homes will be comparatively cheaper for overseas investors. Here’s what Dan Denning had to say in the DR recently.

Chinese nationals are driving up home prices for all Australians by paying 20–30% premiums on homes at the top end of the property market, according to buyers’ agent David Morrell…Morrell told the Financial Review that Chinese buyers are pushing up home prices all along the property ladder by swamping the market for trophy homes above $10 million and houses between $1.5 and $3.5 million.

What effect do you think it will have on Chinese property investors if the ‘stubbornly high’ dollar falls by 10%? Bargain shopping!

Now if you own your home and are thinking that rising property prices will only be good for you, think about this. Your house is priced in Australian dollars. If your home goes up a few percentage points while the Aussie drops 10%, are you any better off? And if you sell your home and plan to buy a new property, the price of that property will have gone up as well.

So who benefits? State governments collecting stamp duty maybe? And of course any foreign investors snapping up bargains with their higher valued currencies.

Certainly not anyone holding Australian dollar denominated stocks or bonds.

Greg Canavan, the Guild’s Value Investing Expert, recently wrote about three stocks you should look to unload in his newsletter, Sound Money. Sound Investments. He had this to say on the value of the Aussie.

All other things equal, a declining Aussie dollar is good for these iron ore producers.

But all other things are not equal. In the real world, a declining Aussie signifies a slowing global economy, which impact on demand for our exports. So if the Aussie falls significantly, the iron ore price is likely to fall significantly further than what I currently expect….

Is it a good thing if the Aussie falls sharply? I don’t think so. The Aussie falls when the world economy is slowing. So while exporters get the benefit of the lower dollar, it comes with reduced demand from our trading partners.

In addition, a weaker dollar drives up import prices and fuel costs. This feeds into inflation which makes it harder for the RBA to cut rates.

The Aussie dollar has been on a bit of a ride this week. This morning it’s trading at US$0.91. Will it go lower? Who knows?

But the next time you read about the ‘stubbornly high’ or ‘persistently high’ dollar, ask yourself what’s so stubborn about it. And who’s driving that media campaign.

In my view the key to future prosperity and growth is not a lower dollar. It’s all about productivity. Working smarter, better, harder, and — if need be — longer. They key is investing in the right training and education for yourself and for your children.

It’s certainly not about depending on the Australian government to outmanoeuvre other nations trying to deflate their currencies to stay competitive.

Bernd Struben,
For Markets and Money

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Bernd Struben is a contribution Editor of Markets & Money. He holds a degree in Economics and is a published novelist. Bernd’s career spans multiple countries on four continents. With his diverse background, he brings unique business insight and a libertarian twist to his columns and analysis in Markets & Money.

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