In the Zone - October 2019

Does the value of the Aussie dollar affect you?

You might think that only importers and exporters pay attention to the value of the Aussie dollar, but movements in the exchange rate affect us all.

After peaking at US$0.81 in January 2018, the Australian dollar fell as low as US$0.66 a few days ago, after the RBA cut interest rates. Our dollar has also fallen against a number of other major currencies.

A falling Aussie dollar makes it more costly to travel overseas and increases the local cost of imported goods. On the upside, it makes many of our exports less expensive for foreign buyers, giving a boost to our farmers and other exporters.

The reverse applies in the case of a rising dollar, but movements in exchange rates don’t just influence our living costs. Most people with superannuation will have a portion invested in overseas assets, and changes in currency values can also influence the performance of retirement savings – a lower dollar boosts the local value of our overseas investments while a higher dollar has the reverse effect.

So what are the main influences on exchange rates?

Ultimately it comes down to supply and demand, and that can be determined by a number of things:

  1. Interest rates. Imagine an Australian investor earning 1% interest on her money. She looks across the Pacific and sees that she can earn 2% in the USA. Here’s an opportunity to double her income! To do so she needs to buy US dollars, increasing demand for the greenback and thus increasing its value against the Australian dollar. Exchange rates respond very quickly to both actual changes in official interest rates, and to expectations of where interest rates in different countries are heading.

  2. Commodity prices. From wheat and wool, to iron ore and natural gas, Australia produces a wealth of commodities. When demand for materials falls less money flows into Australia, and with decreased demand our dollar falls in value.

  3. The economy. If the economy is doing it tough the Reserve Bank of Australia may drop interest rates to encourage borrowing and stimulate investment (as we’ve witnessed over the last decade). This takes us back to item 1. A weak economy relative to other countries attracts less overseas investment, causing the local currency to fall.

  4. Politics. Elections and referenda can create a climate of economic uncertainty that investors, on the whole, don’t like. However, if the market thinks that a more business-friendly government is likely to be elected, this could boost the value of our dollar.

  5. Fear. In times of market volatility and global political upheaval, investors flock to the US dollar as a ‘safe haven’ currency. Most other currencies, including ours, usually fall relative to the US currency.

But it’s not that simple...

Other things can influence currency values, such as speculation or central bank intervention. There’s also a lot of interaction between the influences outlined above. For example, strong commodity prices may give a boost to the economy, which leads to higher interest rates. Throw in some political uncertainty add a touch of speculation and things quickly become very complicated.

Armies of analysts are employed to sift through massive amounts of data in their attempts to figure out where different currencies are headed. However, given all the complexities it is perhaps no surprise that they often arrive at very different conclusions.

So will the Aussie dollar rise or continue to fall? History suggests flipping a coin may provide as useful an answer as following the opinions of ‘experts’!

Your next holiday - why not house swap?

You might remember the movie, “The Holiday” starring Kate Winslet and Cameron Diaz. Two women are experiencing relationship problems so they exchange their houses for a holiday away from men. Kate swaps her quaint English cottage for Cameron’s LA mansion. Both love the extreme differences but, of course, there are men everywhere they go! (It ends happily ever after.)

Since 2006 when that movie debuted, house swapping has taken the world by storm. It’s no longer a way to escape from our problems, but a wonderfully affordable accommodation option – and there are now thousands of homes of all shapes and sizes across the world to swap.

As the name suggests, house swapping is an exchange of homes, for an agreed period, at no cost to either party.

Swapping has many advantages over traditional holidays, including:

• the cost savings make it possible to travel to destinations you might not ordinarily afford, or to stay for longer that you normally could;

• being able to enjoy the privacy, space and comfort of a real home (you might even have a swimming pool to yourself);

• the option to swap vehicles – save money by not hiring a car; or having to rely on public transport;

• access to local knowledge about the best places to eat, shop and visit;

• staying in locations away from the noise and cost of tourist areas.

Other advantages include:

• the security of having your house occupied while you’re away, and

• the opportunity for someone to take care of your pets at home saving you money on kennel fees and making your pets happier too.

Of course, there are downsides. In particular, you are entrusting complete strangers to use your home while you are absent. However, with the growing number of registered websites that allow users to be rated or reported, this risk may be reduced. Doing sound research and getting to know your potential swapper early is crucial. Leaving your holiday contact details with neighbours is always a good idea.

And for more peace of mind, lock away or remove any precious or valuable items such as jewellery.

To find a website to best suit your needs, simply type “house swapping” into your favourite search engine.

House swapping is by no means new – it “officially” began 60 years ago in the US – and with the explosion of websites catering for this growing demand, the only problem now is deciding where to go!

Cashing in with Vitality

Cha-ching! Cha-ching!

‘Vitality’ is the rewards program that many of our clients access when they set up AIA insurance via Investment Zone. By simply tracking fitness activity and completing a few health checks you can easily achieve sizable shopping vouchers and rewards.

Tracking basic activity through his Fitbit device has led to Brad receiving hundreds of dollars in shopping vouchers (which can be used at Woolworths, Myer, Ticketmaster, Rebel and Dymocks).

In August, he received a $60 voucher; then in September he received an $80 voucher!

His next voucher amount will be $100, then $150, then $200! Not to mention the 30% discount on Virgin flights he is enjoying, amongst other benefits.

Go Brad!

Making the most of low interest rates...

Banks have not been passing on the full reduction in the Reserve Bank’s official cash rate, and no one knows with any certainty, what the future holds for rates and to what extent.

Most predictions are that they will remain at the low end for some time to come, so while borrowers love low rates and savers curse them, what can be done to make the most of the situation?

Yay!

Major winners of low interest rates are households with mortgages that were taken out at a higher rate. Keeping up repayments at the original level will see the mortgage paid ahead of schedule, delivering a big reduction in the total interest bill.

Property investors can also be winners, particularly when buying property away from the high prices and low rental yields of inner capital city areas. However, care still needs to be taken to avoid excessive debt that could have a disastrous effect when rates rise.

Businesses benefit from a low and stable interest rate environment. It’s cheaper to borrow to grow the business; and a major reason why the Reserve Bank lowered interest rates to stimulate business investment.

Boo!

For everyone cheering on low rates there will be someone booing them.

People who depend on term deposits, high-interest savings accounts and bonds have seen their interest income fall by more than half! Self-funded retirees are particularly affected, especially where interest payments make up most of their income.

Low rates aren’t always the friend of new entrants into the housing market as commonly touted. Low interest has been a major contributor to the rise in house prices, saddling new borrowers with higher levels of debt. With higher debt, any future rate rises will bite harder, so new borrowers need to carefully assess their ability to meet loan repayments when interest rates do rise. It’s also a good idea to reduce debt whenever possible.

Life is also difficult for investors, including everyone contributing to superannuation. The low yield from conservative investments (cash and fixed interest) means there is a greater ‘cost’ in minimising portfolio risk than has previously been the case. One consequence of this is to drive many investors to search for other investments that offer higher cash returns at a potentially higher risk.

Looking for yield

While a bank share paying an annualised 5.83% dividend (including franking credit) looks very attractive beside a term deposit offering 1.70% interest, it needs to be remembered that, in the current climate, any effort to increase yield comes with an increase in risk. Even so, high yield shares can be a viable option for some investors who need a regular income.

What to do?

The best way to navigate the world of low interest rates depends very much on your personal circumstances. Good advice is critical, so talk to your licensed financial adviser about your situation.

We help busy Professionals and Business Owners like you every day. Book in a free Financial Health Check at www.investmentzone.com.au/bookonline or call us on 1300 124 683.

The information in this communication has been prepared on a general advice basis only. The advice has been prepared without taking account of your specific objectives, financial situation or needs. Accordingly, you should, before acting on the advice, consider the appropriateness of the advice having regard to your objectives, financial situation, and needs. In cases where the advice relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure Statement (or other relevant information statements) and consider such document before you make any decision about whether or not to acquire the product. For these reasons, it is imperative that you seek advice from your financial adviser before making any investment decisions. Investment Zone Pty Ltd (ABN 18 104 622 611) provides financial services as a Corporate Authorised Representative no. 296974 of Financial Force Pty Ltd ABN 42 091 425 464, AFSL no. 238337

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