The days of choosing an overseas trip over an Australia holiday because of a strong exchange rate have passed.
The Australian dollar has fallen more than 14 per cent in 2013, and now buys around 89 US cents.
And if you’re thinking a holiday in New Zealand will still be cheap, the news might be just as bad.
The Aussie has fallen 13 per cent against the kiwi dollar to abound 108 New Zealand cents, the weakest it has been in five years.
Market watchers expect the Australian dollar to fall further in 2014, possibly down to 85 US cents, which is Reserve Bank governor Glenn Stevens’ preferred level for the local currency.
“In a nutshell, we are looking for additional losses in the Australian dollar in the first half of the year followed by a recovery in the second half,” BK Asset Management managing director Kathy Lien said.
“But its sell-off against the greenback should be gradual and limited to 85 US cents.
“The Australian dollar is also vulnerable to a move to 105 New Zealand cents.”
The Reserve Bank of New Zealand is about the only central bank in a developed economy that considering raising its interest rate in the new year, which could drive the New Zealand dollar higher.
Ms Lien said the Australian dollar is losing value because of lower commodity prices, and the chances of a cash rate cut by the Reserve Bank of Australia in 2014.
“Investors are divided on whether the RBA will ease again next year and until that uncertainty is lifted the Australian dollar could remain weak,” she said.
The US Federal Reserve’s scaling back of bond purchases will also be a major factor in the Aussie’s performance against a strengthening greenback in the new year.
“If Fed tapering fails to drive the currency lower and the economy continues to grow below trend due to rising unemployment and weak demand, the RBA could pull the (rate cut) trigger.”
Commonwealth Bank economist Diana Mousina doesn’t expect the Australian dollar’s fall to be too heavy.
“The risks to the Australian dollar appear reasonably balanced and largely centred around the path the Australian domestic economy takes as it transitions from mining-led investment to non-mining led economic activity,” she said.
“If we are correct about a successful economic transition for the Australian domestic economy, then the risk is the Australian dollar is higher than our forecast of 89 US cents for the end of 2014, as Australian interest rate markets price an RBA interest rate hike.”
