The sell-off in the Aussie dollar has accelerated recently and many forecasters are cutting their expectations for the year. CBA recently revised their year-end outlook for the Aussie dollar with a forecast that it would fall below $0.60 to the US dollar by the start of 2024. This is obviously bad news for overseas travellers but the impact on investors is more complicated.

Reasons for the Weakening Aussie Dollar

There are two reasons that may explain the weakening Aussie dollar:

• Interest rate differential: The RBA cash rate is currently 4.10%, while the US Fed Funds rate is 5.5%. Investor funds tend to flow to countries with higher interest rates which increases demand for those currencies.
• Weakness in the Chinese economy: This may impact demand for iron ore and other commodities that make up a large portion of Australian exports. Commodity demand has traditionally impacted the Aussie dollar.

Australian Investors with Global Investments

A weakening Australian dollar is positive for local investors who own overseas investments via direct shares that trade on global exchanges and managed products like funds and ETFs. Returns from global investments have two components: price movements of the underlying holdings and changes in the exchange rate between the Australian dollar and the local currency of the investment.

For example, between July 13th and August 18th:

• Amazon shares moved from $134.04 to $133.22 (a slight US dollar loss of 0.80%).
• The AUD/USD exchange rate dropped from $0.69 to $0.64.
• Converted to AUD, this resulted in a gain of $1,517 or 7.8% despite the US dollar loss.

Hedged vs unhedged investments also highlight currency impacts. For instance:

• IVV (unhedged): 14.25% annual return
• IHVV (hedged): 9.37% annual return

The Impact on Australian Companies

A weaker Australian dollar affects companies in multiple ways:

• Exports may be more competitive if priced in AUD.
• Profits made overseas are worth more in AUD.
• Input costs from overseas suppliers rise.
• Consumer demand for global products may fall due to higher local prices.
• Currency hedging may delay these effects.

Economic Impact of a Weakening Aussie Dollar

A weakening AUD affects the economy by:

• Making exports cheaper and imports more expensive
• Contributing to inflation
• Putting pressure on the RBA to raise interest rates or delay rate cuts

What Are the Options for Investors?

Investors should avoid reacting emotionally or frequently adjusting their portfolio due to currency movements. However, some strategic adjustments can be considered:

• Stick to your hedging strategy, whether hedged or unhedged.
• Recognize that the AUD is historically low (~$0.60).
• Consider allocating more to hedged global equities if aligned with your strategy.
• Rebalance your portfolio if global shares have become overweight due to currency effects.

These strategies acknowledge historical trends while staying true to a long-term investment approach. Currency is one of the biggest factors influencing global investing outcomes.