Where the Aussie dollar is telling us to travel this year

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Almost every economist agrees, the Australian dollar has a tough six months ahead, and for hungry travellers keen to take on the world while their mortgage rates are rising, every dollar counts.

So if you’re committed to travelling, but you want to get maximum bang for your Aussie bucks, where do you travel to? Let’s look ahead at what the predictions for interest rates and the Australian dollar tell us.

Vietnam is shaping up as a great option for travellers keen to get the most bang for their buck.Credit: Shutterstock.com

Currently, we’re at the tail end of a pandemic and global supply chain shock, facing hyperinflation which is driving up interest rates and the cost of living. The Reserve Bank in Australia has been trying to slow the economy down and is potentially nearing or at the end of the raising cycle if inflation stays on the downtrend.

This is because in Australia, most people on fixed home loans only have them locked in for 2-3 years. So, any tightening in the interest rate cycle hits consumers fast and hard in the hip pocket, their consumer spending locks up, and the economy slows.

Malcolm Wood, the Head of Asset Allocation at Ord Minnett, says the economic indicators in Australia have already rolled over, so if there is any future rate rise it is just the Reserve Bank making sure they’ve done the job of slowing inflation properly.

In the USA, the Federal Reserve has been even harder at work raising interest rates, trying to manage inflation more extreme than ours. Traditionally, home loans in the USA are taken out for 30 years and many have done this in the last few years at interest rates close to 1 per cent. So, it is a lot harder for the Federal Reserve in America to slow their economy down with rate rises.

If you’re trying to keep your purse strings tight, there’s a lot of sense in looking at destinations with a lower cost of living.

They barely touch the hip pocket of most American homeowners. And that’s what leads to the currency challenges ahead. Economists, including Wood, are predicting that the Fed in the US has a fair way to go in their cycle of tightening before they can reverse inflation in any meaningful way.

When interest rates are rising in one country and declining in another, we get a divergence, which is a vacuum for money throughout the world into the countries with rising rates, driving their dollar higher. The country with lower interest rates sees outflows and their dollar deflates.

According to Wood, this interest rate divergence between Australia and the US will, in their most likely scenario, see the US dollar keep on rising and the Australian dollar get sucked lower, making it more expensive for Aussies to travel to the US later this year.

The AUD/USD peaked at 71¢ in January against the USD and is currently hovering around 67¢ having dipped under 65¢ late in May. Commonwealth Bank institutional forecasts expect it to fall to 62¢ in the September quarter and remain in the mid-60s until March 2024.

Wood also expects the European Union to have to raise rates again, driving their currency growth somewhat in line with or behind the USD in the latter half of the year. This means that Europe and the USA could cost you more in Aussie dollars than other destinations.

So if the USA and potentially Europe are both off the menu, where will our dollar have some power this year and next? My money is on Japan and China, and, with the New Zealand central bank indicating their raising cycle might be over last week, New Zealand could also be a neutral option.

“The broad-based US dollar strength puts the Yen at weak levels in real terms, especially given the lack of inflation in the Japanese economy in recent years. Even if the Aussie doesn’t do so well, Japan is still likely to be a lot cheaper to visit than the US,” Wood says.

“And in China, we’ve seen the Renminbi weaken quite significantly this year. So it likely makes for good value for money if people are interested in travelling to China again.”

Real value for money is an important consideration in times like these. Japan’s annual inflation has been running at just 3.5 per cent over the last year, so their goods and services prices haven’t increased anywhere near as much as in Australia, Europe and the US.

If you’re trying to keep your purse strings tight, there’s a lot of sense in looking at destinations with a lower cost of living and less expensive accommodation prices this year too, making Bali, Thailand, Vietnam and Japan, appealing destinations this year and early next year while the interest rate divergences wash out.

Remember, trends can change and so can predictions, so keep your eye on the road ahead.

Bec Wilson is the author of How To Have An Epic Retirement now available for preorder and writes a weekly newsletter for pre- and post-retirees at epicretirement.net.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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