AUI: Falling Australian dollar threatens capital investment

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If the Australian dollar continues to fall, and interest rates in the US and UK rise as expected, we could well see a rush of capital out of Australia, warns David Bryant, chief executive officer at Australian Unity Investments.

David Bryant

“The Australian dollar has already dropped to a four-year low and more downside is likely.  I wouldn’t be surprised to see it go below 80 US cents in the near future.

“Added to the fact that both the US and UK have interest rate increases on the horizon, the probability is that capital will be looking for other homes.

“In the UK, some Bank of England board members are already pushing for a rate increase to happen now rather than in 2015, and the US Federal Reserve has also indicated that it will increase rates around April.

“Both of these factors will have a significant impact on the Australian dollar.

“The other factor pressing on the Australian dollar is falling commodity prices.

“Iron ore prices have almost halved from their peak and crude oil prices are down by almost one-third.  With OPEC unlikely to cut production, it is likely that prices will continue to decline.

“Given the fall in iron ore prices, what is surprising is how well the dollar has held up so far.  This shows just how much foreign capital is chasing Australian interest rates, which remain high by global standards.

“However, once the interest rate differential shrinks – which will happen sooner rather than later – that foreign capital will flow out in in rush.

“With the USA currently in holiday mode due to Thanksgiving, there is limited data coming out at the moment, but it will be interesting to see the data in early December as this will give a good indication of how 2015 will get started.

“As it is, other US data, while not perfect, has been consistently positive, which means the US is becoming more attractive to investors,” Mr Bryant said.

Australian Unity Investments (AUI) is the funds management arm of financial services, health and retirement living services provider Australian Unity. AUI provides specialist mortgage, property, fixed interest and equity products to investors.

AUI’s investment approach is to use its established in-house expertise in property and mortgages while also forming joint ventures and strategic alliances with other specialist organisations.

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For more information please contact:

David Bryant – Phone: 03 8682 4401

25 November 2014