In the past few months it seems most Australians have been barracking for the same team (unless of course you are an exporter). All of us are on team ‘Aussie Dollar’. It’s been a popular pastime watching the little Aussie battler tentatively approach and eventually surpass parity with the US dollar. It’s also risen sharply against a number of other major currencies as well.
For many of us it means that imported televisions are much cheaper and a holiday to the US, UK or any other number of destinations has become significantly more affordable than it would have a year or so ago.
This benefit brings me to a meeting I had with clients a few months ago. They are a young couple getting married in Bali in the coming months. At the time of the meeting the Aussie dollar was buying 93 cents US. With upcoming costs in US dollars they asked me whether they should take advantage of the apparently favourable currency exchange and transfer money to US dollars now or wait until the wedding date.
Ultimately they were asking me whether I thought the Australian Dollar was going to go up or down. There’s a question you are only ever going to get right 50% of the time, even though economists make a living giving very well reasoned arguments.
At the time my thoughts were mixed. It would seem logical with the AUD being high compared to the long term average that it would make sense to take advantage of the conditions at the time and transfer some money across. However, I know there was no economic principal that currency had to tend towards the mean. In fact, who is to say that 93 cents wouldn’t be the new long term average going forward? Or even $1.07 as the price is now?
Ultimately the advice I gave was do what makes you feel most at ease, because no matter what you do there’s only a 50% chance of being right. Given they had already met about half of their planned overseas expenses, which was effectively a 50% hedge against future currency movements, they held off transferring the money which as it turns out, has worked well for them (so far).
So how can we take advantage of currency movements and when should we hedge? Accepted wisdom would be you hedge when currency is low and don’t hedge when currency is high. The problem with that is foreign exchanges have no intrinsic value; it is just a relative measure of one currency against another currency. There is no reason why the AUD couldn’t go to $2 or down to 50 cents. The factors that affect currency change by the minute and it is why trying to guess where currency is going is flawed. Economists always put a caveat on their predictions along the lines of “based on all known information we expect the Australian dollar to….”. Therein lies the issue, new information comes in every moment thus potentially rendering a prediction invalid within a day.
Before the GFC in 2008 the Australian dollar peaked close to 98 cents. At the time articles were written along the lines of ‘To Parity and Beyond’ with economists forecasting the Australian dollar to shoot through the psychological dollar mark and keep heading skywards. What actually happened was in the space of a few months the Australian dollar fell to a whisker above 60 cents. This of course brought the doomsayer economists out predicting the Australian dollar to plunge below 50 cents all with reasoned rational arguments. Nearly 30 months later we sit at around $1.07 US.
So how do we take financial advantage of currency levels today?
Take a holiday to Bali!