Where the Australian Dollar is headed and what it means to Singapore

Singapore's interest in Australian assets has been growing for many years given the proximity, stability, and well-regarded educational institutions. With the recent drop in the Australian Dollar (AUD) of more than 25%, this interest has only strengthened. An important consideration for many Singapore-based investors is therefore... 'where to next for the Australian dollar'.

Singapore’s interest in Australian assets is particularly highlighted with the property figures. To quantify this demand, foreign investment in Australian property currently accounts for approximately 13% of the overall turnover in Australian real estate. Of this, Singapore currently ranks as the fourth biggest source of funds for Australian property, with approximately $2 billion spent in 2013 and this has increased since.

Given this interest, a key consideration is what the next move in the AUD will be and what could be the catalyst to drive it in one direction or the other. The Reserve Bank of Australia (RBA) has a very tough fight on their hands, in trying to tame the strong Australian Dollar.

RBA Governor Glenn Stevens wants to see the Australian Dollar below US$0.75 to strengthen the non-mining sectors of the economy, including tourism, education services, and other key service exports. Without a weaker Australian dollar, Aussie goods are quite simply priced out of the global markets. The desired direction for the AUD is quite clearly a depreciation of the currency.

With a clear direction by the RBA and overall Australian economy that they need a weaker Australian Dollar to revive the Australian economy, let’s look at what action steps the RBA could take to make this happen.

1) Talking the AUD down:

The RBA have tried making public statements previously to state that they forecast a weaker Australian Dollar in the hope that this would reduce its appeal to foreign investors. This has proven unsuccessful at best in the past and this success rate is unlikely to change in the near-term.

After their recent announcement that they MAY not cut interest rates any further, the RBA witnessed a surge in the AUD by over 1.2% against the USD. We can therefore discount this as a strategy to weaken the AUD.

2) Rising global rates:

If interest rates were to rise in other mature economies this may reduce the relative appeal of the Australian Dollar for foreign investors. While this sounds reasonable in theory, it is highly unlikely in practice, at least in the short- to medium-term.

Given that both Japan and Europe are injecting billions in liquidity and easing Monetary Policies, it is unlikely foreign interest rates are going to rise in any developed market other than the US in the short-term. We then therefore discount this option also. This really leaves only one option for the RBA to consider if it wishes to see a weaker Australian Dollar.

3) Further Rate Cut:

Given the strength of the Australian dollar, a key strategy for the RBA may simply be to cut interest rates further in 2015. This will reduce investment yields for foreign investors and may see them pull out of some of their AUD-denominated investments.

How much of a downward impact a further rate cut would have on the Australian Dollar remains to be seen, but most major analysts are forecasting US$0.70 - $0.75. As a Singapore-based investor, this may mean that your Singapore Dollar goes 5 – 10% further when investing in Australia, adding to the 20+% appreciation against the AUD you have already seen since early 2013.