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Speaker 1: Welcome to Ask Fear and Greed, where we take your

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Speaker 1: questions and do our best to answer them. I'm Michael Thompson,

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Speaker 1: and good afternoon, Sean Aylmer.

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Speaker 2: Good afternoon, Michael.

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Speaker 1: Today's question comes from Buster via Instagram, and so there's

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Speaker 1: plenty of ways that you can send you a question in.

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Speaker 1: It can be Instagram, LinkedIn Facebook, or head along to

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Speaker 1: our website Fear and Greed dot com, dot a you

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Speaker 1: and send it on through there. But Buster has gone

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Speaker 1: to Instagram and he says, hey, fellas, I have a

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Speaker 1: question about our currency, and he certainly come to the

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Speaker 1: right place. What are the major factors that affect the

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Speaker 1: strength of the Aussie dollar. He goes on to say,

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Speaker 1: what conditions would we need to see in order for

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Speaker 1: me to get more bang for my buck next time

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Speaker 1: I exchange currency on holiday? Now, Sean, this is a

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Speaker 1: this is a question that is right up your alley

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Speaker 1: because it is one that you are constantly winging about

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Speaker 1: whenever you are planning an overseas trip.

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Speaker 2: Well, do not travel at the same time I travel.

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Speaker 2: That's what my main suggestion would be, because I reckon

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Speaker 2: our currency is always weakest when I'm going overseas. Plenty

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Speaker 2: in your question, though it's a great question, because all

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Speaker 2: an exchange rate is the value of one currency in

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Speaker 2: terms of another, So one Australian dollar will buy sixty

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Speaker 2: six point six US cents or thereabouts. The exchange rate

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Speaker 2: has a very direct effect on the prices we pay

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Speaker 2: for imports, if for buying something for overseas, or how

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Speaker 2: much people will overseas pay for our purchase our inports

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Speaker 2: from so our exports are bought from overseas guys. That's

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Speaker 2: a direct effect. It has an indirect effect on the

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Speaker 2: economic activity and inflation. To answer the question, the short

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Speaker 2: term drivers of the currency are mostly interest rates and

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Speaker 2: risk sentiment. So higher interest rates in Australia compared to

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Speaker 2: other countries means that Australia is a more attractive destination

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Speaker 2: for investors, so they buy Australian dollars to invest their

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Speaker 2: money in Australia. If Australian rates are lower, then they're

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Speaker 2: less likely to be in Australia. So when we talk

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Speaker 2: about interest rates in the US going down and staying

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Speaker 2: the same in Australia, that should actually help the Aussie dollar,

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Speaker 2: not that it really has, but it should help the

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Speaker 2: Aussie dollar. The other thing in the short term is risk.

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Speaker 2: So if people think economies are crapping out, they all

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Speaker 2: go to the US dollar. It's kind of the risk

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Speaker 2: free currency.

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Speaker 1: Did you just use the term crapping out?

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Speaker 2: Yeah, that's an economic term.

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Speaker 1: I love it. You know what that does, It makes

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Speaker 1: economics successible.

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Speaker 2: That's right.

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Speaker 1: We should have more terms like crapping out. Please go on,

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Speaker 1: I interrupted you.

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Speaker 2: So that's short term. Longer term interstrates still matter. That's

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Speaker 2: one thing. Commodity prices that's really important. If people are

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Speaker 2: buying Australian iron ore and coal, they need Australian dollars

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Speaker 2: to pay for it, so they demand more Australian dollars.

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Speaker 2: So if commodity price is going up, people have to

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Speaker 2: pay more. They need more Australian dollars. The demand for

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Speaker 2: Ausralian dollars go as up the currency appreciates. Trade flows matter,

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Speaker 2: so we're buying lots of stuff or selling lots of stuff.

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Speaker 2: That means there's more or less Australian dollars in demand.

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Speaker 2: Hence it goes up or it goes down in the

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Speaker 2: very short term, so buster is going overseas next month.

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Speaker 2: It kind of depends what markets think about interest rates.

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Speaker 2: Now there is something which I think we need to

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Speaker 2: talk about which bear with me on this one, and

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Speaker 2: I think the Reserve Bank for some help. Don't roll

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Speaker 2: your eyes, Michael, this is I'm not.

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Speaker 1: It's just like I know that whenever you say just

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Speaker 1: bear with me on this one, like, oh, dear Lord,

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Speaker 1: we are in for a lesson.

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Speaker 2: Here we go. So, something called the purchasing power of

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Speaker 2: parity a great economics concept. It basically connects the level

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Speaker 2: of exchange rates to the level of prices between economies.

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Speaker 2: The best example is something the economist introduced called the

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Speaker 2: big mac index. Why is it that a big mac

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Speaker 2: in one country is more or less expensive than a

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Speaker 2: big mac in another country. Theory suggests that over time,

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Speaker 2: exchange rates are just so that the cost of an

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Speaker 2: identical basket of goods and services is exactly the same

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Speaker 2: in two countries. So purchasing power of parity says a

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Speaker 2: big mac ultimately should cost the same in the US

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Speaker 2: as it does here, as it does in Britain. For example,

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Speaker 2: if goods and services in Australia expensive relative to the

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Speaker 2: same goods in other economies, over time demand for our

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Speaker 2: goods expensive ones should decrease. That lowest the demand for

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Speaker 2: Australian dollars causes the Australian dollar to depreciate. When it depreciates,

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Speaker 2: it means that basket of goods Australian goods and services

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Speaker 2: equalizes with other countries. It basically purchasing power of parityreas.

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Speaker 2: The process of adjustment occurs until Australia's goods and services

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Speaker 2: are no longer expensive relative to those in other countries.

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Speaker 2: It's the theory, so let's put it into practice. The

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Speaker 2: Economist Big Mac Index okay last updated July twenty twenty four.

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Speaker 2: End of July twenty twenty four. So the US is

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Speaker 2: the base currency. A big mac in the US costs

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Speaker 2: five dollars sixty nine US YEP. In Britain it costs

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Speaker 2: four pound fifty nine. On the purchasing power of parity,

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Speaker 2: the implied exchange rate is point eight one. That's four

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Speaker 2: point five nine on five point sixty nine. The difference

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Speaker 2: between this and the actual exchange rate the actual exchange

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Speaker 2: rate is zero point seven eight, suggests the British pound

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Speaker 2: is over valued. Take the australion. So what it says

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Speaker 2: for US is that our big max are cheaper than

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Speaker 2: the Big Max in the US. I don't know how

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Speaker 2: much Big Mac is here, but they're five dollars sixty

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Speaker 2: nine in the US. What the purchasing power of parity

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Speaker 2: says is that the Australian dollar is actually undervalued by

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Speaker 2: about eleven percent against the US dollar.

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Speaker 1: Basically, for Buster, if he wants to travel overseas, just

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Speaker 1: put all of your holiday savings into Big Max.

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Speaker 2: You sort of yeah, I didn't think I was going there,

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Speaker 2: but I'm happy to go there.

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Speaker 1: I just poor Buster. Poor Buster has asked a simple

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Speaker 1: question here about how do I make sure I get

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Speaker 1: the most bang for my buck when I travel on holidays?

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Speaker 1: And we have gone down an economics rabbit hole, and

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Speaker 1: you know what, you know what, Sean, I've actually enjoyed this.

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Speaker 2: Have you can I tell you, Bust what I do

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Speaker 2: when I travel overseas, because normally when you travel overseas,

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Speaker 2: you you know months in advance. I'm sort of dull

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Speaker 2: and what I do. So let's say I'm going to

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Speaker 2: take a thousand dollars, say and take three thousand dollars overseas.

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Speaker 2: I buy I'm going to the US, I buy a

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Speaker 2: thousand dollars now, I don't buy one thousand dollars halfway

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Speaker 2: between now and the point I'm going, and I buy

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Speaker 2: one thousand dollars at the end when I am going,

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Speaker 2: because then I'm never fully right and I'm never fully wrong.

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Speaker 2: Reread the risk.

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Speaker 1: That's very, very That is sage advice.

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Speaker 2: Stage don't try, and don't try and measure like foreign

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Speaker 2: currency is just too hard. I think Alan Greenspand famously

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Speaker 2: said flip a coin and you've got as much chance

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Speaker 2: of getting that right as knowing whether the US dollar

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Speaker 2: is appreciating and depreciating. So spread the risk, Buster, spread

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Speaker 2: the risk.

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Speaker 1: That makes a heck of a lot of sense. And look,

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Speaker 1: I think that is a real kind of little pearl

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Speaker 1: of wisdom that Buster can take away from this.

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Speaker 2: I feel like, if he's still listening, it was a wild.

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Speaker 1: Ride, but I feel like we really got somewhere of

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Speaker 1: value towards the end.

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Speaker 2: Maybe and buy itself a big mac cheap in Australia.

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Speaker 1: Big max economy is crapping out. What was the other

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Speaker 1: thing that she said, averaging it out? Kind of about the.

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Speaker 2: Risk, mitigate your risk. There we go, half right, half wrong.

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Speaker 1: There we go. Look, you know what I think we've

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Speaker 1: done it. Thank you Buster for the question, thank you

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Speaker 1: Sean for answering it.

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Speaker 2: Thank you Buster, Thank you Michael.

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Speaker 1: And if you've got something that you would like to know,

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Speaker 1: then please send through your question on LinkedIn, Instagram, Facebook,

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Speaker 1: or at Fearandgreed dot com dot au which is also

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Speaker 1: week and sign up for our free weekly newsletter where

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Speaker 1: we feature one of these questions every week. I'm Michael

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Speaker 1: Thompson and this is Ask Fear and Greed