The flip side of cheaper home loans, assuming the Reserve Bank (RBA) continues to cut the official cash rate later this year, is a falling Australian dollar (A$) which has been under pressure for some time. Admittedly, predicting the dollar’s fortunes is something of a weird science, but generally, if the RBA cuts rates, the A$ comes under pressure with lower interest rates discouraging foreign investment.
While the rate cut will likely weaken the A$, making imports more expensive, hopes for less aggressive US tariffs saw the US$ fall and in turn helped the $A get back above US$0.63 after falling to around US$.60 earlier this month.
Mixed blessings for the A$
However, the $A is likely to be buffeted between changing perceptions as to how much the Federal Reserve (the Fed) will cut relative to the RBA, the negative impact of US tariffs, a potential global trade war and the potential positive of more decisive stimulus in China.
As a result, AMP chief economist Shane Oliver suspects the A$ could be stuck between $US0.60 and $US0.70.
However, Oliver reminds the market that the risk is skewed to the downside if Trump ramps up tariffs more than expected.
With a moving dollar heralding mixed blessings, you need to work out if future currency volatility spells more good or bad news for your wallet.
Winners and losers
Given that you own Australian shares, either direct or via your super fund, it’s critical to understand how they’re affected by a falling dollar.
First the good news. A lower dollar is helpful for exporters (offshore earners like miners and manufacturers) that become more price competitive on overseas markets.
Offshore earners also benefit from what is called the "translation effect".
In other words, they receive a nice boost when large amounts of their revenue in US dollars are converted to Australian dollars on a balance sheet.
As a general rule of thumb, a 10% drop in the dollar could typically increase company earnings by an estimated 3%.
That’s a plus if you own shares, as this can affect the share price.
However, it’s the discretionary firms that import goods, like Harvey Norman (ASX: HVN) and JB Hi-Fi (ASX: JBH) that see their costs rise as the dollar falls.
This can result in a double whammy of your shares declining in value, and higher prices at checkout.
For example, while the sharp decline in the A$ from about US70¢ last September has made local property more attractive for foreign investors, it has hiked the domestic price of fuel.
For example, a weaker currency recently pushed national domestic retail pump prices to a weekly average of 186.9¢ a litre, well above the two-year low of 156.8¢ a litre in mid-October.
Tips for stretching your dollar
Air fares: A lower dollar can be equally harmful to your hip pocket, as it buys less foreign currency.
With fuel costs accounting for 30% of airline operating costs, you also risk higher air fares.
Petrol: Stretch your wallet further by gassing up when it’s cheap.
If you spot a bargain while driving, fill up, and don’t forget to get that extra 4 cents per litre off using a voucher.
Fill up a week before major holidays, especially Easter, and remember that turning off air-con can drive your petrol 20% further.
Check out sites like MotorMouth for the lowest fuel prices.
Cheap seats: Booking well in advance should give you the cheapest seats on any plane.
Watch out for flight specials or price alerts and use frequent flyer points wisely.
Flight forecasts: Kayak, Google Flights, Hopper or Cheap Flights can indicate whether to buy now or wait for cheaper fares.
At checkout: Buy more staples (in your kitchen and bathroom) when they’re heavily discounted.
Hotels and clothes: Shopping online using a discount code often results in a 5 to 10% discount and always cross-check prices across multiple sites.
Home loans: Consider the next RBA rate cut as an opportune time to renegotiate your home loan or find another one.
Buying FOREX: Never exchange money at an airport, foreign hotel or shop with lousy rates.
If you think the dollar might fall while you’re overseas, consider locking in an exchange rate with a prepaid travel card.
Always spend in local currency, and avoid costly travellers’ cheques, unless you’re paranoid about robbery.
Cheap and cheerful: Consider destinations where your dollar drives further.
If you still want to travel and get reasonable value, consider Bali instead of London.
