Understanding the effects of currency movements is essential to successfully investing in the stock market. You cannot assume that a strong exchange rate means strong economic growth. Like the stock market, the exchange rate can be determined by the sentiment of buyers and sellers and not on fundamentals. That is, exchange rate movements may be driven by speculation. A strong exchange rate may affect the economy in different ways. These are the negative and positive implications of a strong Aussie dollar.
Holidays will be cheaper for Australians when the Australian dollar is high. This is a positive for tourism companies such as airline companies. Cheaper airfares will encourage more Australians to travel overseas. A strong Aussie dollar means travellers can buy more with their funds compared to a weaker dollar.
Imports will be cheaper which means imported goods such as luxury cars and other imported durable goods will be inexpensive for the consumer. This is a positive for retailers who use imported goods. As the cost of imports decrease, this can create more disposable income for households.
Companies which use imported parts to manufacturer goods will see a high exchange rate as a positive. This is because it decreases their costs of imported parts which can then increase their profit margin.
Lower Interest rates
The RBA does not want the exchange rate to be too high as it will affect our export industry. Hence a high currency rate will lessen the chances of a rate hike. A rate hike could encourage currency investors to invest in Australian dollars. Exporters may be pressured to cut their prices to stay competitive which will affect their profit margin.
A higher Aussie dollar can make exports more expensive and can drive overseas buyers to import from other countries with a lower exchange rate. Iron ore and coal are our top two exports and a high exchange would negatively impact these industries and our economy.
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Education is our third largest export. Universities have large numbers of foreign students so strong exchange rates can deter students from studying in Australia when they have other options such as Canada, UK, and the US.
A strong currency rate can make imports cheaper so this can create less demand from locally made products. If demand from local companies is drastically reduced then it can cause job losses if companies are finding consumer demand of their products lagging. This in effect can cause a slow down of the economy as high unemployment means less disposable income from households which means less aggregate demand from consumers.
Less Foreign Visitors
A high Aussie dollar will deter foreign visitors to our country which will affect our local tourism industry. A high exchange rate would make travel to Australia more expensive. Our local tourism industry generates billions of dollars a year for the Australian economy. A decrease in foreign visitors would affect local tourism companies and jobs.
Lauren Hua is a private client adviser at Fairmont Equities.
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