In recent times, the value of the Australian dollar has been falling precipitously, particularly in comparison to the value of the US dollar.
This week, the Australian dollar reached a low of US63.63 cents, the lowest since November of last year. Except that drop and a greater one that occurred during the early stages of the Covid pandemic scare – when one dollar could purchase just approximately 57 cents in US currency – the dollar has not been this weak against the greenback since the global financial crisis in 2009.
A parallel story may be told about the value of the dollar in comparison to the euro. On Friday, it could buy less than 59 euro cents, which, if you ignore the slump caused by Covid, was also the lowest it had been since the Great Financial Crisis.
Visitors from the United Kingdom attending the World Cup in Australia will get roughly $2 for every pound they spend. Aside from the decline caused by Covid, the last time the value of the dollar was this low in comparison to the value of the pound was during the Brexit referendum, when the United Kingdom chose to withdraw from EU.
However, the comparison currency that people in Australia most frequently hear about is the US dollar. Although only a minor fraction of Australia’s total trade is conducted with the United States, the majority of Australia’s exports are commodities that are priced in US dollars, therefore the currency exchange rate is an important factor.
There are two primary elements at play here. The unexpected strength of the United States economy has caused many people to anticipate that Federal Reserve will increase its key interest rate once more after the hike in July, bringing it up to a range of 5.25%-5.5%.
On the other hand, the cash rate maintained its 4.1% level during the entire month of June at the Reserve Bank of Australia. Recent events, including a minor improvement in wage growth and an increase in the unemployment rate, have contributed to the widespread belief that the RBA has completed its mission.
Investors will be encouraged to purchase United States dollars and sell Australian dollars as a result of the interest rate disparity between the two countries, which has the potential to grow much larger.
The unexpectedly slow economic resurgence that China has experienced after its harsh Covid lockdowns is the second major effect. In contrast to the price challenges that have been primarily elsewhere, deflation in July has only served to exacerbate those concerns.
Because of China’s extensive involvement in international trade, investors frequently use the currencies of Australia and New Zealand as a stand-in for the yuan. The total value of Australia’s exports to China, including those to Hong Kong, is about equivalent to those to its next four largest trading partners combined.
The Reserve Bank of Australia (RBA) placed “China’s uneven recovery from Covid-19 restrictions” at the very top of its list of “key domestic uncertainties” in its most recent quarterly statement of monetary policy.
The foreign exchange markets “can be very fickle and very dramatic,” according to Ray Attrill, who is the head of foreign exchange strategy for NAB.
His staff is currently modifying its forecast that the Australian dollar will reach approximately 70 US cents by the end of the year, a result that is becoming “increasingly untenable” However, the so-called psychological level of 60 U.S. cents is “getting a lot of airplay,” despite the fact that the NAB has not yet predicted that this will be the case.
As Japan, China, and South Korea each in turn let their currencies weaken to support their respective export industries, a “doom loop” is currently in the process of developing. According to Attrill, “an ongoing function of the Bank of Japan’s policy setting” is to maintain the value of the yen low in comparison to the value of the US dollar.
“It’s making the monetary authorities in other parts of the world – no more so than in China – to not want to have Japan steal a march in terms of export competitiveness,” he says. “It’s making them not want to have Japan steal a march in terms of export competitiveness.” Therefore, it appears that people are growing accustomed to the weakness of their own currency.
After decades of being at risk of deflation, Japan’s economy is now seeing increasing levels of inflation due to the weakening of the yen. This outcome has the potential to win over China as well at this point.
It also appears that the correlation between the price of commodities and the value of the Australian dollar has become less trustworthy. Historically, an increase in the prices of commodities led to an increase in the value of the dollar, and vice versa.
Recently, the US dollar and commodities such as oil have traded in the same direction, which has been positive for the dollar’s value. Attrill credits part of the shift to supply mayhem, particularly in the aftermath of Russia’s invasion of Ukraine, which has camouflaged the actual supply-demand balance. Attrill blames this to the fact that the balance between supply and demand has been obscured.
According to Attrill, the trajectory of Shanghai’s top 300 businesses share index can be one proxy to watch if you want to predict where the Australian dollar will be in 2023 even though nobody knows where it will finish up.
“All of our export clients are pretty happy bunnies” since they are enjoying “a windfall when they’re translating mostly US-dollar earnings back into Australian dollars,” according to Attrill. In the meantime, “all of our export clients [are] pretty happy.” Many tourists from other countries, particularly those in town for the World Cup, will have been more willing to spend money as a result.
He claims that importers will experience “a world of pain” if they bring in goods from countries such as Italy, where the currency has been moving in tandem with Australia’s; but, the situation will be less severe if they bring in goods from China, where the currency has not been moving in tandem with Australia’s.
According to Attrill, their ability to set prices will determine whether or not they are able to pass the cost on to their customers.
The RBA mentioned in its most recent statement that the dollar was “broadly around its levels in May on a trade-weighted basis” but that it has “depreciated of late.” This was mentioned in reference to the dollar’s recent trend.
NAB is the only one of the big four commercial banks to anticipate another increase in interest rates from the RBA, and a decline in the value of the dollar may force it to do so.
“With the currency doing what it’s doing, it’s got to add to the risks that they will be minded to raise rates further,” adds Attrill. “It’s got to add to the risks that they will be minded to raise rates further.” “And obviously, if that happens, that would be a supportive influence for the currency,” the speaker continued. “[A]nd if that happens…”