An exchange semester in Canada now costs Australian students roughly what it would at home. The Australian dollar touched 1.0016 Canadian dollars this month and is trading at 0.9891 today. For Australian uni students tracking their global purchasing power, the Aussie dollar is punching well above its weight.
The main driver is the interest rate gap. The Reserve Bank of Australia has lifted the cash rate four times this year to battle domestic inflation, most recently to 4.60% this week, it’s highest level since 2011, while the Bank of Canada has held its overnight rate at 2.25%. Because of this gap, foreign investors chasing higher returns buy Australian government bonds. They need Australian dollars to do so, which pushes up demand for the currency. Strategists flagged this dynamic in April, when the RBA was already raising rates while other major central banks held steady.
The gap with the US is smaller, as markets expect the Federal Reserve to keep tightening, so US investors have less reason to move money into Australian assets. Demand for the Aussie is weaker as a result. It fell below US70¢ this week after Governor Michele Bullock said the board had considered holding rates. Investors took that as a sign another hike was less likely, which lowered the returns they expect from Australian assets and reduced demand for the currency. That same shift is why the Aussie has slipped back from its peak against the Canadian dollar.
Whether Australia stays a magnet for global money now depends on the gap holding. If the Bank of Canada raises rates at its October 28 meeting, Canadian bonds pay more and the Aussie loses part of its pull. The RBA could widen the gap again, with CBA flagging a follow up hike to 4.85% if September quarter trimmed mean inflation comes in at 1% or higher. For Australians more widely, a stronger dollar against the Canadian dollar makes Canadian goods and holidays cheaper. It also means Australian exporters selling into Canada earn fewer Australian dollars, and Australian investors holding Canadian shares see their returns shrink when converted back home.
