Our floating currency has served us well since it first hit trading screens on December 13, 1983. But it’s acted as a shock absorber during some of the worst periods of global instability, both politically and economically. Our relatively lower interest rates will weigh on the Australian dollar as speculative money looks to the US and Europe for better returns. Inflation might be rapidly falling, but economists will stick to their textbooks to argue another rate rise is needed. It’s little wonder why it’s earned the reputation of being the dismal science, writes business editor Ian Verrender. The first was that huge amounts of foreign money flowed into Australia to build new mines and expand existing ones.
This was after the property development firm reported a $1.1 billion annual profit, thanks to a booming property market and government construction subsidies. The company, which supplies chicken to KFC, will pay its shareholders a total dividend of 16.5 cents per share (up 17.9 per cent). While some of our leaders still debate climate change and energy policy as an ideological issue, the world is moving on — but Australian businesses long ago realised it was an economic issue. This resilience means that fears of a currency problem for the Reserve Bank are low-key. “We do think [that], by early next year, the Federal Reserve will have gotten close to the point where they’ve got rates in fairly restrictive territory. “That leaves the Aussie dollar very vulnerable from an interest rate differential perspective,” Mr Franulovich explained.
AUD/USD Daily Chart
When covering investment and personal finance stories, we aim to inform our readers rather than recommend specific financial product or asset classes. The COVID-19 virus has disrupted the Chinese economy, shutting down factories and halting infrastructure work in a manner we have never seen before. Also, quarantines in place have contributed to a sharp decline in the amount of commodities they need to import from Australia. Our household sector has taken a beating from mortgage hikes, far greater than American households, which is showing up in a sharp fall in household spending. When the pandemic hit, and everyone including us slashed interest rates to zero, we were pretty much on a par with the US.
It’s largely because of two large influences over the Australia dollar – interest rates and commodity prices. This changed relationship has another major implication, which Jake probably won’t like. Australian monetary policy via the official cash rate will now have to become much more activist in order to compensate for the reduced shock absorbing role of the exchange rate. This means easing even more aggressively during global downturns, but will also require tighter monetary policy during global upswings, as Jake notes in his piece. They include concerns about how the ongoing pandemic will influence China’s economic growth and therefore its demand for Australia’s commodities, like iron ore. The stronger China’s demand for iron ore, coal and gas, the more interest there is in Australian dollars.
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Talk of a pending global recession and a drop in some key commodity prices had a big impact on the AUD. Mind you, the central bank is fully cognisant that exchange rates shift, but views it a mug’s game to try to predict them. Instead, they base each quarterly set of predictions on the Aussie dollar’s value at the time.
The RBA hiked rates by 25 bps in its last meeting on 7 February 2023, as expected by markets and predicted by ING Group’s economists. ING saw Australia’s interest rates peaking at 3.6%, up from the current rate of 3.1%, as of 6 January 2023. The key drivers for the AUD’s performance are interest rates and inflation data and aganist the USD, which has expereinced higher interest https://investmentsanalysis.info/ rates and inflation compared to Australia, the AUD fell at a steady rate for most part of 2022. There is a very high chance (more than 80 per cent) the US central bank will lift rates by an outsized 0.75 percentage points at its November next meeting, according to futures pricing. The central bank has also committed to keeping interest rates this low until 2024.
The Aussie dollar is not expected to stay so low
It’s dipped into the 40s before and at other times it has seen almost half its value wiped out in weeks. Just as the strong dollar hollowed out our manufacturing sector, a prolonged bout of weakness may deliver a resurgence in local manufacturing, particularly as the world shifts to new technologies around electrification and renewable energy. The Reserve Bank’s mission to bring inflation down to its target range of between 2 and 3 per cent appears to be on track, but how confident of this can we be? In the mid-1980s, shortly after then-treasurer Paul Keating warned we could end up a “banana republic” if we didn’t implement critical reforms, it briefly dropped below $US0.50. It went there again in September 2001 after the terrorist attacks on New York’s World Trade Centre threatened to derail global trade. In the aftermath of the GFC, the Australian dollar soared to post-float highs inflicting some serious damage on the economy.
- Ms Masters said the Australian dollar had actually appreciated 3 per cent against major trading partners in the year to date, despite losing 7.4 per cent against the US dollar.
- The amount above zero represents the premium to US money markets we’ve had to offer foreigners to park their money here.
- “Our members in the importing community have had a really rough three years — they’ve had COVID-related supply chain crises, that flows into sky high shipping rates, and also our biosecurity agency is quite chronically challenged.
- “But they didn’t. They cut by a much smaller increment, and the immediate reaction was for the Aussie dollar to fall by a good 1 per cent,” he added.
- Chinese policymakers have responded with a spate of support/stimulus measures in recent months, but those measures have yet to have a meaningful impact on sentiment.
Sydney Airport reported its first-half loss nearly doubled, days after it rejected an improved $22.8 billion buyout offer from a consortium of infrastructure investors. Iron ore has fallen deeply into a bear market, having plummeted by 43 per cent from its record high in May ($US233 a tonne). “The market has been hit with steel mill closures in China as authorities look to reduce emissions from the sector. The company also reported its underlying full-year profit jumped 54 per cent (to $237 million) — in line guidance but slightly below ‘the market’s very high expectations.
Iron ore continues to tank
Travellers also feel the hip pocket nerve when they go to exchange their dollars for greenbacks, and realise they’ve received less than they expected. Business owners feel the pain when the cost of purchasing equipment sourced from overseas rises. Westpac’s currency strategist Sean Callow says, in the short term, the local currency is likely to drop to 68 US cents – roughly where it was in June 2020.
It examined what a sustained 5% depreciation of the exchange rate would do, but the reverse can also be assumed if the dollar strengthened. Key RBA forecasts – such as GDP growth accelerating from 4.75% in 2021 to 5.5% in 2022 before slowing to a 2.5% clip in 2023 – are based in part on those exchange rates. Most global currencies rose from their bottoms against the US dollar in November 2022 after October US inflation data came in lower than expected. The market moved quickly to price in a slower pace of US Fed rate hikes going forward.
The advantages of a weak currency
The European Central Bank (ECB) is also expected to lift rates by 0.75 percentage points, while the Bank of England is tipped to announce an increase of at least 1 percentage point (or 100 basis points) at its next meeting. The Australian dollar fell as low as 63.23 US cents on Monday afternoon, its lowest level in two-and-half years. Australian shares have fallen significantly, tracking heavy losses on Wall Street as worries about higher interest rates and a potential recession in the United States hurt investor sentiment. The world’s most volatile currency is part of the G-10, the world’s 10 most powerful economies. Minutes from the Fed’s July meeting loomed over markets this week, which showed officials discussing easing back on unprecedented economic stimulus by year’s end. “This fall could accelerate, with the China Iron & Steel Association calling for exporters to reduce overseas sales to ensure domestic supplies.”
- Traditionally, global cyclical downturns that have weighed on global stocks have seen an offsetting benefit whereby weaker commodity prices have raised the AUD value of offshore equities via a weaker exchange rate.
- “The [US] September CPI [consumer price index] report should show a moderation in goods prices that is a likely harbinger of a broader slowing in core inflation.
- Top banks in Australia and New Zealand have a less pessimistic outlook for the Aussie (AUD) compared to the Kiwi (NZD) – reflected in their AUDNZD exchange rate forecasts in 2022.
- Elsewhere, ING’s Australian dollar forecast for 2023 saw the AUD/USD exchange rate at 0.71 by the fourth quarter of the year, as of 13 December.
- It suggests the US economy is still performing strongly, fuelling bets that its central bank, the Federal Reserve, will continue hiking interest aggressively to the point it may trigger an economic downturn.
It may also keep more Australians employed if the global economy slows down or even tips into recession. While it makes imports more expensive, and hence could make inflation a tougher Bill williams trader battle to win, it makes exports more competitive. The amount above zero represents the premium to US money markets we’ve had to offer foreigners to park their money here.
The Aussie dollar is dropping against the US currency, but it’s not all bad news
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