The RBA kept their rates on hold this week at 7.25%, in what was a widely anticipated move by the market. The decision follows recent data pointing to a slowdown in domestic demand, reflecting the impact of four rate hikes since August. Rising fuel and energy costs have curbed consumer spending, and the Bank will want to continue to monitor the effects their rate hikes have had before taking any further action.
The RBA, however, does remain on a tightening bias and most analysts believe that the central bank could hike rates again before the end of the year (twice) with the first rise potentially coming in August, depending on inflation data and pressure on the economy.
Inflation is also the central focus for the Bank of England. After the UK left their interest rates unchanged at 5% last month, the minutes from their meeting confirmed market expectations that rates could be left on hold for some time. The decision today, and subsequent minutes two weeks later, should provide more clarity on their current stance.
So how has this affected the $AUD?
Once again the AUD continued to strengthen against the Pound throughout May reaching a low of just over $2.03, a 10 cent difference from the month’s high of almost $2.13. The high interest rates offer extremely good yields and therefore attract foreign investment; the greater the demand for Aussie Dollars, the stronger the currency and hence the exchange rate goes down. When you combine this with the slowdown in the UK economy and the drop in the housing market, it explains why we have seen such a sharp decline in the exchange rate.
The rates have now dropped almost 25 cents from the beginning of the year, which would be a difference of $25,000 if you were moving £100,000 across to start your new life with.
Can it go any lower?
Unfortunately we can’t rule this possibility out, as we saw in the mid 90’s when it hit just below $1.88 back in 1996. The psychological $2.00 is being widely cited as the next key level and there is little evidence suggesting that we won’t see this in the coming weeks. However, as the credit crunch has proven, nobody can predict where the markets will go and as such the decision about when best to send over your money will be different from person to person.
It is important to remember that the rate of exchange is not going to be the reason you have chosen Australia, with the lure of fantastic job and lifestyle opportunities for yourselves and your children most probably being the decision for your move. However, you will all want as many dollars to start your new life with as possible, and so learning about your options and managing your exposure properly is critical in making this happen.
There are different ways to move your funds abroad and different strategies that you can adopt. For those who feel that they wish to protect themselves against any further loss then there are options to fix into a rate of exchange with a 10% deposit. Those with a bit more risk appetite and optimism may adopt a hedging strategy or chose to set a “market order” which is essentially an automatic buying tool at a predetermined rate.
