In a recent Sky News Australia broadcast earlier today (see below), Australia’s Federal Treasurer, Jim Chalmers, announced Australia’s latest inflation data—a drop to 2.8%, marking the lowest rate in over four years. But what are the potential AUD exchange rate impacts of today’s news?
This post-COVID milestone is a positive sign, with inflation now in the Reserve Bank of Australia’s (RBA) target range of 2-3%. The RBA has been watching these numbers closely, and this achievement hints at potential stability ahead. But what does this inflation drop mean for the Australian dollar (AUD) and, most importantly, for our expats around the globe?
In today’s article, I’ll lay out some of my thoughts about the above, and about the things that might be worthy of consideration, given today’s numbers.
Just My Two Cents (Not Financial Advice!)
Before we get into the details, I want to clarify that whilst this article considers the potential AUD exchange rate impacts of inflation and interest rates, this is purely my perspective on today’s news.
This article isn’t financial advice—so please, don’t rely on it as such! Expat Taxes Australia doesn’t specialise in foreign exchange, and any currency decisions should be made with the guidance of foreign exchange (FX) experts. Here, I’m simply sharing my thoughts on Jim Chalmers’ announcement and how we at Expat Taxes are thinking about our own currency strategy in light of these trends.
While today’s article delves into potential impacts of inflation and exchange rates on currency values, the actual outcomes could be very different!
What’s also important to remember is that inflation and interest rates are only a small part of the picture. Other key factors also play a role in exchange rates, including geopolitical stability, trade balances, employment rates, and economic growth projections.
My thoughts and today’s article don’t address these additional factors and variables, so be sure to bear that in mind as they are crucial and should always be factored in by anyone considering currency exchange decisions. As always, if you are considering making foreign currency decisions, we highly recommend that you seek specialist advice by consulting with qualified and experienced, foreign currency exchange experts who will be able to assist you to make the best decisions for your circumstances.
Australia’s Current Economic Climate
Australia’s recent inflation rate of 2.8%, the lowest in four years, has finally returned within the Reserve Bank of Australia (RBA)’s target range of between 2-3%. This aligns with the RBA’s inflation policy goals, supported by reduced energy and fuel costs, and government rebates, all of which have tempered consumer price growth. Despite this improvement, core inflation remains at 3.5%, which is keeping underlying pressures elevated, particularly related to rent, childcare, groceries, household goods and other essential services.
The RBA’s upcoming decision on 5 November 2024, following Melbourne Cup Day, will hinge on a balance of these factors. With the cash rate currently at 4.35%, some economists are arguing for a rate reduction however I suspect that the RBA may maintain its cautious stance by keeping rates on hold for the time being, seeking further confirmation that this month’s figures are not just a flash in the pan, considering the persistence of core inflationary pressures in Australia.
For detailed information, visit the Reserve Bank of Australia’s cash rate overview page.
Australia’s Inflation Dip: How Does Australia’s Inflation & Interest Rates Compare With Key Trading Partners
Here’s a quick look at Australia’s inflation and interest rates against its top trading partners, revealing potential FX trends based on inflation and interest rate yield differentials:
| Country | Inflation Rate (Oct 2024) | Interest Rate (Oct 2024) |
|---|---|---|
| Australia | 2.8% | 4.35% |
| China | 0.4% | 3.35% |
| Japan | 2.5% | 0.25% |
| European Union | 2.1% | 3.4% |
| United States | 2.4% | 5.0% |
| South Korea | 1.6% | 3.25% |
| Singapore | 2.0% | 3.07% |
| Taiwan | 1.82% | 2.0% |
| India | 5.49% | 6.5% |
| New Zealand | 2.2% | 4.75% |
| Thailand | 0.61% | 2.19% |
Note: Click the following link to download a a PDF document detailing the full table for your reference.
The table above highlights Australia’s competitive yield position, especially compared with low-inflation countries like Japan and Thailand. This yield advantage tends to support a stronger AUD, as higher yields attract foreign investment. However, if major economies like the U.S. maintain higher interest rates or if inflation rates continue to decline globally, there may be upward pressure on the AUD to weaken as funds shift toward other high-yield economies.
Australia’s Key Trading Partners – Potential AUD Exchange Rate Impacts
Understanding the AUD’s future against the currencies of Australia’s main trading partners gives us insight into how exchange rates might behave. Here’s a quick overview of Australia’s top ten trading partners, how they stand with inflation, and what it could mean for the AUD exchange rate – see below:
- China: China’s inflation is notably low, at 0.4%, with interest rates of 3.35%. The stability of the yuan (CNY) due to low inflation could lead to steady demand for the AUD-CNY exchange, especially as China remains a major consumer of Australian exports.
- Japan: With inflation around 2.5% and low interest rates at 0.25%, Japan’s economy encourages lower currency yields. If the RBA maintains higher rates, we may see AUD appreciate relative to the JPY, appealing to investors seeking returns.
- European Union and Eurozone: Inflation in the EU sits at 2.1% and 1.7% respectively, with interest rates slightly higher than Australia’s. This positioning might lend some strength to the Euro (EUR) against the AUD, particularly if the RBA pauses interest rate cuts in coming months.
- United States: The US Dollar’s (USD) high interest rate of 5% combined with 2.4% inflation has kept it strong, and the AUD may see pressure against the USD unless the RBA considers rate hikes. The USD’s strength makes it advantageous for expats to hold on to their USD assets for now.
- South Korea: South Korea’s inflation rate (1.6%) and a moderate interest rate of 3.25% position the South Korean Won (KRW) similarly to AUD. We can expect moderate AUD-KRW fluctuations with potential for minor appreciation if Australia maintains steady rates.
- Singapore: Singapore’s balanced inflation and interest rates suggest stability. This stable Singapore dollar (SGD) could hold up well against the AUD in the near term, with incremental changes depending on RBA and Monetary Authority of Singapore (MAS) adjustments.
- Taiwan: Taiwan’s balanced inflation and moderate interest rates indicate a steady New Taiwan Dollar (TWD). Expats in Taiwan may wish to hold TWD, converting gradually to AUD as required.
- India: India’s inflation of 5.49% and high rates of 6.5% could weaken the Rupee (INR) slightly against a steady AUD. For expats in India, converting some funds to AUD could be advantageous if the depreciation of the Rupee continues.
- New Zealand: With a 2.2% inflation rate and interest rates of 4.75%, the New Zealand Dollar (NZD) is closely aligned with the AUD. Expats in New Zealand may not see major fluctuations and could convert to AUD gradually to balance exposure.
- Thailand: Thailand’s 0.61% inflation rate paired with moderate rates makes the Thai Baht (THB) fairly stable. For expats with THB, there may not be any pressing urgency to convert currency when sending money to Thailand, however it might be worthwhile transferring THB to AUD if money is required in Australia or if they anticipate having any large expenses in Australia.
Strategic Considerations for Australian Expats
Let’s explore some potential strategies that Australian expats might consider based on these exchange rate dynamics. Your currency decisions could differ significantly upon your own specific circumstances, depending not only on the country that you’re based in and how its currency interacts with the AUD, but on a multitude of various economic and geo-political factors
So remember, when making currency decisions, as numerous factors can affect their outcomes beyond just inflation and interest rates it’s critical that you carefully consider your unique financial and tax circumstances and it’s essential that you consult with specialist foreign currency exchange experts who can provide specific guidance based on current market conditions and tailored to your individual needs.
Keep that in mind as I lay out a few of my own thoughts for various expat scenarios:
- For Expats Earning in USD: The robust USD, supported by high US interest rates (5.0%), makes retaining USD a sensible option, especially if you’re waiting for the RBA to make a definitive rate adjustment. Delaying conversions to AUD could be prudent, as the USD is likely to maintain its strength. Expats might consider holding USD investments until the RBA’s stance on potential rate hikes becomes clearer, especially if you plan to convert in early 2025.
- For Expats in the UK: With moderate inflation and competitive interest rates, the GBP is likely to hold its value against the AUD. For expats, gradually converting GBP into AUD could serve as a hedge against potential RBA rate adjustments. Smaller, periodic conversions provide flexibility and reduce risk in an uncertain rate environment.
- For Expats in the Eurozone: The EUR’s stability against the AUD means minor movements are expected. If you’re planning on converting to AUD, consider making periodic, small transfers to take advantage of the current stability. This strategy allows for potential gains if the AUD remains on a moderate upward trend without sudden rate cuts by the RBA.
- For Expats in Japan: The JPY’s low value relative to the AUD due to Japan’s low-interest rate policy makes it ideal for expats to consider converting JPY to AUD sooner rather than later. If the RBA holds rates steady, further AUD appreciation against the JPY could follow. By securing favourable rates now, you can optimise returns as Japan’s economy maintains its low-rate stance.
- For Expats in New Zealand: With New Zealand’s inflation and interest rates aligning closely with Australia’s, the NZD is likely to maintain a stable exchange rate against the AUD. For expats, gradually converting NZD into AUD could be a safe approach, especially with incremental rate changes that might slightly benefit the AUD in the months ahead.
- For Expats in India: India’s higher inflation rate and elevated interest rates (6.5%) indicate a slight risk of INR weakening. Converting INR to AUD might be beneficial if inflationary pressures persist, causing the INR to depreciate further. Expats may wish to act sooner rather than later if converting to AUD aligns with your financial plans, especially if inflation remains higher than in Australia.
- For Expats in Singapore: Singapore’s balanced inflation and moderate interest rates mean the SGD is likely to stay steady against the AUD. Expats could consider holding onto SGD if immediate AUD needs aren’t pressing. Incremental conversions may also work well here, as SGD-AUD exchange rates are expected to see limited fluctuation in the near term.
- For Expats in South Korea: South Korea’s moderate inflation and mid-level interest rates make the KRW relatively stable. Expats could retain some funds in KRW, converting gradually if their plans involve future AUD expenses. South Korea’s positioning suggests only slight fluctuations against the AUD, offering some flexibility for incremental transfers.
- For Expats in China: China’s low inflation and stable interest rates make the AUD-CNY rate relatively predictable. Expats may benefit from staged conversions if they wish to secure AUD for large expenses in Australia, though immediate conversion pressures are minimal. Given the AUD’s steady demand in trade with China, modest CNY stability is expected.
- For Expats in Thailand: With Thailand’s low inflation rate (0.61%) and moderate interest rates, the THB remains steady. Expats holding THB may consider converting a portion to AUD if significant Australian expenses are on the horizon, especially while the AUD holds steady. A balanced approach of holding THB and transferring gradually can provide flexibility based on upcoming financial needs in Australia.
Closing Thoughts
Time will tell, but Australia’s return to the target inflation range reflects Australia’s economic resilience, but the RBA will likely hold off on major policy shifts until core inflation aligns more closely with the headline rate.
For expats, these trends present both challenges and opportunities. As the RBA approaches its November 5th meeting, staying informed about inflation and interest rates, particularly from Australia’s key trading partners, can help expats make sound decisions when handling currency exchanges.
Whether opting to convert funds to AUD or holding steady, consider your broader financial goals and the evolving economic landscape and, as explained earlier, always seek the advice of specialist foreign currency exchange experts who can assist you to make the best decisions for your specific circumstances.
With this strategic view, you can position yourself advantageously within your currency markets while maximising the benefits of Australia’s improving inflation outlook.
If you have any questions about the above, contact our team or feel free to book an appointment with us today!
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