Currency Dilemnas for Travelling Aussies

BUY currency now or wait? This is the big question facing Australians right now

With the Australian dollar (AUD) at record highs should you be buying USD’s or Euros now if you are expecting to go abroad during the upcoming northern summer?

Many travelers must be facing a dilemma. On the one hand the AUD is already so high; how can it keep going? If it doesn’t then travelers will be kicking themselves they didn’t buy some currency at today’s prices.

On the other hand Australia is in the midst of an export boom the likes of which we have probably never seen. What’s more India and China show few signs of slowing down any time soon so demand for our resources is increasing, if anything. The Federal government is looking at ways to provide more labour to the mines even though we are at full employment. The proceeds of those mineral exports are in USD and much of the capital investment is in USD but the fly-in fly-outs have to be paid in AUD and so do the suppliers of many of the services. Therefore the greater the exports the greater the more demand there will be for the AUD which will continue to keep it strong.

Of course there are many scenarios that could upset prospects for the AUD, of course. A new war anywhere will scare people out of minor currencies such as the AUD back into the only real alternative; the USD. Default by a European country such as Greece will bring the Euro temporarily to its knees. I rate such a default as almost a certainty. Again the only alternative is the USD.

Greece is not coping with the harsh terms of its bailout from Brussels. Unemployment is 15% (compared with Australia’s 5%). Greek government bonds have such high spreads they have become untouchable. Wages are declining therefore spending will decline leading to lesser capacity to pay interest on mounting national debt.

Greece, Ireland and possibly Portugal are almost certain to have to default on at least a percentage of their loans to have any chance to recover. Over 60 countries have defaulted on their national debt since 1970 so it not that unusual. There will be short term shock to the currency, national pride and ability to borrow.  The quicker these countries face the music the smaller the percentage of their loans they will have to default on and the less dire the consequences. The Euro will fall further (stimulating exports, particularly German ones), at least temporarily. Travellers to Europe may find it to their advantage to wait for further weakness in the Euros before purchasing.

Although turmoil in Europe will give support to the USD, that country has urgent problems of its own to face starting with a calamitous hurricane season and an economy drowning in national debt. In fact during may the US will hit its self imposed ceiling of USD14trillion. If the ceiling does not get increased the US government will shut down.

In conclusion, if I were traveling abroad within the next 6 months. I would be inclined to wait to buy any foreign exchange even though the AUD broke through the USD 1.10 this morning and despite the US being buoyed by Osama Bin Laden having been bumped off.

I am not a financial adviser, however, so please seek independent and sound financial advice before delaying your currency purchase. Normally I would advise buying half now, half later, but these are not normal times.

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Comments

It really is a dilemna and such a gamble, but I am going to hold off a few more months after reading this!

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