I am commonly asked about what is happening with the Australian dollar, particularly since its rise from a low of around US 57 cents in March 2020 to circa US 79 cents at the time of writing. Being in Singapore the AUD/SGD exchange rate is also of particular interest for most Australians with the AUD over the same period soaring from lows of SGD 83 cents to SGD 105 cents.
With many of my clients raising queries or concern for a rising Australian dollar and how that relates to their personal wealth or business profitability, I wanted to take the time to discuss two of the key drivers of the AUD and the impact of its recent appreciation.
Interest Rate Differential
This refers to interest rates in Australia compared to those in other major economies such as the US, Europe and Japan. Interest rate differential drives the supply and demand for Australian dollars, i.e. if interest rates are higher in Australia relative to other countries, this drives demand, attracting buyers of the Australian dollar and hence appreciating in value.
With interest rates in some parts of the world at zero or even negative, Australian rates are currently relatively higher than most countries. By example the US 10yr Treasury yield is about 1.44% against the Aussie 10yr Government Bond at 1.73%. ¹
Terms of Trade & Commodity Prices
The terms of trade are a measure of the ratio of export prices against import prices and typically the Australian dollar will appreciate with an increase in the terms of trade (and vice versa).
Commodity prices are a key contributor to Australia’s terms of trade and with commodities accounting for a significant share of Australia’s exports they play a big role in export prices. (Typical contributors are Iron Ore, Natural Gas and Agriculture). Hence you often hear the Australian dollar being referred to as a “commodity currency”.
A prime example is iron ore, where typically an increase in ore prices will result in higher exports prices and an increase in the terms of trade. When commodity export prices are higher, more Australian dollars are required to purchase the same amount of commodity exports. This again drives demand for Australian dollars and results in appreciation of the AUD.
In the following chart you can see Iron Prices (Blue Line) over the past 1 year rising from $84/ton to $172/ton with the AUD/USD exchange rate closely following the same trajectory. (Orange Line).
Iron Price vs AUD/USD over 1 Year¹
There are of course various other levers that can impact the Australian dollar, such as purchasing power parity, inflation, and general risk sentiment, but I won’t expand on these for now.
What is the impact?
Many Australian business owners are traversing both the Aussie homeland and the Asia region or into Europe and the United States. Currency risk is a key consideration in managing your cashflows and supply chain when exposed to multiple jurisdictions.
Consider the scenario where you have significant operations and expenses in Australia (and therefore in AUD), yet you also distribute your products/services offshore in somewhere like Singapore and receive SGD currency for those goods/services. Repatriating this revenue to Australia can be costly when the AUD is trading higher. For example, SGD $10,000 today is worth circa AUD $9,523, whereas 12 months ago that SGD$10,000 would have bought you closer to AUD$12,048.¹
On the other hand, should you be an Australian business largely operating in Australia, but purchasing your raw materials or “widgets” offshore, you are saving a pretty penny with a high Australian dollar. (Inversely, your materials purchased offshore will cost you more when the Australian dollar depreciates)
As expatriates in Singapore, typically earning in SGD currency, we must also consider this example above when dealing with our free cash flow, lump-sum savings and investment portfolios. The big questions for business and individuals being, should I send money home and is it a good time?
The answer is of course “it depends”, as it is based on your individual or business circumstances. My biggest tip is to always consider what will you do with your capital after you exchange it back to AUD? I look forward to sharing some further insights and strategies around currency risk in future articles.
Past performance is not indicative of future performance.
The author is Nick Whalan, Senior Private Wealth Manager, Select Investors, a Partner Practice of St. James’s Place (Singapore) Private Limited and can be contacted on Nick.firstname.lastname@example.org. If you would like to learn more on this topic, Select Investors regularly presents educational webinars around wealth management, tax and succession planning. The next webinar presented by AustCham and Select Investors will be on Australian tax planning for the move back home can be found here.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives. Members of the St. James’s Place Partnership in Singapore represent St. James’s Place (Singapore) Private Limited, which is part of the St. James’s Place Wealth Management Group, and it is regulated by the Monetary Authority of Singapore and is a member of the Investment Management Association of Singapore and Association of Financial Advisers (Singapore). Company Registration No. 200406398R. Capital Markets Services Licence No. CMS100851. St. James’s Place Wealth Management Group Ltd Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom. Registered in England Number 02627518.