The Australian Dollar may be riding high for now, but a reality check is on the way and the price is expected to fall against the US Dollar by the end of the year.
BNP Paribas global head of FX Steven Saywell predicts the Aussie dollar will drop from the relatively current heady high of around 73 US cents to around 67 cents by the end of this year, where it will languish for most of 2016.
In September the Aussie dollar slipped to a seven year low of just under 69 US cents on the back of worries about the state of the Chinese economy.
Australia has a commodity driven export economy that has been hit by falling demand for resources from a slowing Chinese economy.
As the Aussie dollar weakens against the US dollar and other Asian currencies, the concern is the cost of living may rise and spending power of Australians on fixed incomes, such as expat pensioners may fall.
QROPS pensions can boost spending power
For those thinking about shifting their UK pensions into a Qualifying Recognised Overseas Pension Scheme (QROPS), an extra benefit on top of tax advantages and flexible investment opportunities is the pensions can pay out in several major currencies.
This allows a British expat in Australia to receive their pension payments without tax deducted in US Dollars direct into their local bank accounts.
Although the Australian Dollar is benefitting from a light touch from the Reserve Bank of Australia and a retreat in expectations of an imminent US interest hike, the time will come when the Federal Reserve in Washington will ratchet up the rate.
Rate cut on the horizon
“Australia has probably got to cut rates in the same way as other commodity producers such as Canada, Norway and New Zealand have,” said Saywell.
“If the Reserve Bank takes no action, the markets will write in a margin just in case and this will see bond yields drop.
“The cost of borrowing could fall, but the currency will weaken as well. The mining sector will suffer, but a lower dollar could see tourism boosted for Australia.”